Capital War : How Foreign Companies Fight Their War in China 9781844641246, 9781844641086

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Paths International Cases in Modern Chinese Business

Capital War: How Foreign Companies Fight Their War in China by Wang Kangmao

Capital War

Preface At present, the worldwide concern about environmental problems leads to serious thinking about the social responsibilities of transnational companies in the international community. From Nike’s employing child labor globally to McDonald’s making junk food over the whole world, from the bribery scandal of Lucent to Microsoft’s global monopoly, transnational companies are not only changing the political and economic ecology of the contemporary and the futuristic world, but are also bringing disastrous consequences to developing countries, for example, they transfer local national wealth, causing local unemployment, quality and environmental problems, tax evasion and cultural aggression, etc, and such negative effects also could be witnessed in China. Nowadays, there are 60,000 transnational companies with 500,000 subsidiaries worldwide, which in total control 50% of the world economic aggregate, 60% of the world trade volume, and 80% of the amount of foreign direct investment (FDI). The total sales of transnational companies reach 11 trillion US dollars, which is twice that of the total export volume. Reviewing the 30 years’ process of introducing foreign capital, in my opinion, there are three phases: the first phase was the early fraud period, when many bogus companies from Hong Kong and Taiwan that had no enough funds concluded numerous contracts with Chinese enterprises, and then applied for loans from Chinese state-owned banks upon their corporate seals. They earned some benefits due to favorable policies and privileges available at that time, while we suffered a lot of losses. The second phase is the kowtow period from 1990s to now. After we recognized the reality of the first wave of bogus companies, we put more efforts in introducing world top 500 transnational companies. As such companies are famous all over the world, and have abundant capital and sophisticated technologies, governments at all levels have been implementing the kowtow policy toward them, and policies in various regions would give them favorable treatments such as land and policy privileges. For instance, the central government proposed to consider integrating two types of income taxes on enterprises the year before last, which was denied by just a jointly written letter from dozens of transnational companies. Due to our generosity, transnational companies have made rapid development in China and finally stand firm, and at present the numbers of subsidiaries of transnational companies in China are as follows: 1334 from Japan, 896 from EU, 718 from the United States, 79 from South Korea and 69 from other countries. After 1

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being well-established in China, foreign invested enterprises are gradually monopolizing the Chinese market, causing negative impacts to the overall economy, local businesses and the masses of China. Firstly, the foreign invested corporations have completed capital monopoly. Most assets of 21 major industries out of the total of 28 in the country has been under control by foreign invested enterprises, for example, as summarized in this book, Kodak has acquired all factories which manufacture photographic equipments and developing and printing materials over the country; Caterpillar has acquired Xiagong, Liugong, Yigong, Shangong and Weidong, and L’oreal has acquired most of domestic cosmetic brands such as Mininurse, Dabao and Yue Sai. Secondly, foreign enterprises have formed market monopoly. Most high-end manufacturing businesses have been monopolized by them, for example, Microsoft has monopoly over 95% of the computer operating system market, Sweden Tetra Pak has monopolized 95% of Chinese flexible package market, France’s Michelin has monopolized 70% of Chinese radial tire market, Ericsson, Samsung and Motorola together have monopolized 70% of the cell phone market in China, P&G has monopolized 70% of the cosmetics and household chemical market, and Japanese manufacturers have monopolized 100% of the office equipment market. In addition, 90% of the prime advertising time segments of CCTV and other satellite channels are bought out by transnational brands. A clear proof is that Yao Ming and Liu Xiang, national hero athletes have become exclusive advertising spokespersons of Coca Cola and other foreign brands. Thirdly, they have formed technological monopoly. For every DVD we sell, half of the export price is allocated to the international 6C alliance, and 30% of the computer sales profits shall also be submitted to foreign merchants, since we only own 0.03% of intellectual property rights. Fourthly, they have formed brand monopoly. The automobile industry of China have become processing factories of foreign brands, among them more than 100 auto brands in China, only 3 of them have independent intellectual property rights. Fifthly, foreign enterprises have intensified the problem of domestic unemployment. According to statistics, every time a foreign invested enterprise hires an employee, four domestic employees would lose their jobs.

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Sixthly, they have transferred national wealth out of China. Foreign invested enterprises have transferred their profits abroad in forms of internal transfer pricing, a variety of patent fees, management fees, commissions, consulting fees and under other items, and are conducting serious tax evasion in China, causing huge gap between GDP per capita and average family income (about 5,000 US dollars). Seventhly, they have caused the surge of foreign trade surplus of China, as foreign invested companies

take up 50% of exports and the proportion is still rising.

In addition, there are many other problems such as environmental pollution, product quality, resources, labor exploitation, employment of child labor, arrogance to suppliers and consumers, bribery and so on concerning the role of multinational corporations in China. So I think we have come to the third phase now, which is deemed as the introspection period. The first thing we need to introspect is: we have surrendered the market honestly, while the foreign invested enterprises have not transferred technologies over to us, which means that we have been implementing the kowtow policy over-zealously. The second thing we need to introspect is: we have compromised over-enthusiastically at the stock equity requirements by foreign investments. According to my verification, of the shareholding ratio limitations on foreign investments of all countries, the average ratio of developed countries is 26%, and that of developing countries is 42%, while the average ratio of China is as high as 54% (refer to my new book Capital: New Edition), which is 12 percentage higher than that of developing countries. Such compromise not only has contained Chinese domestic enterprises, but also has brought harm to the interests of most developing countries. The third thing we need to introspect is: if we continue to give the foreign invested enterprises green light and let them develop under no restrain or regulation, as foreign invested enterprises usually have abundant capital, strong foundations and high-end technologies, they have already overwhelmed many Chinese enterprises, regarding which the cell phone industry is a typical example: three foreign cell phone brands have defeated all Chinese cell phone manufacturers within just one year. At this rate, in less than a decade, most of the high-end manufacturing and retail businesses will be controlled by foreign invested enterprises. And the fourth thing we need to review is: on account of our large population, the consequences of foreign monopoly will bring about serious negative outcomes to our economy and life There are already a handful of serious problems in current China, such as the extremely high unemployment rate among college students, inflation, soaring prices, the stock market

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bubble, rich state versus poor citizens, shortage of energy and resources, the root of which can be found in the monopoly by foreign investments more or less. In order to be able to obtain clear results of our introspects, we need to have case study materials, so I made a series of in-depth research and compiled 12 cases of foreign invested enterprises raging capital wars in China. I am a serious and pragmatic scholar, a doctor who has been trained in complete Western modern finance and accounting subjects. For more than 20 years, I have kept talking with facts, thinking with rationality and writing with conscience. I have no intention to describe the transnational companies in China as bad boys, but only wish to present the details of the capital war which is going on in China clearly to the government, businesses and the public. I hope that China could explore a Singapore-style way under which foreign invested enterprises and domestic enterprises could co-exist and flourish together while continuing to pursue the policy of introducing large foreign investments, and allow common people to accumulate real wealth in this process, so as to make the people rich and the nation strong. From my rational judgment, if neither any national would pay any attention to the phenomenon stated in this book, nor any excellent corresponding policy (for example, controlling majority interests, compelling technology transfer, compelling honest tax payment, setting down the employment scale and carrying out campus recruitment) would be taken, in a decade or two, although China will still be a sovereign state, it will be a country wholly monopolized by foreign capital, in which except that a small group of Chinese people will be working for foreign invested enterprises, the remaining population will either be unemployed or waiting for social security relief. I have no intention to put forward a warning to a prosperous nation, but I believe that my judgment will be proved true by history, just like the recent twenty years during which all my policy forecasts (together with the policy of reducing tax and enriching people as stated in Wealth of the Nation) have been proved by the reality of economic development in China. I wish to awaken the nationals by this book. May god bless my fellow people would be better off, Chinese enterprises would live up to our expectations, and transnational enterprises would be sufficiently conscientious. Finally, I would like to express my thanks to the substantial contributions made by all the following students I teach in East China University of Political Science and Law, who are from Grade 2005 finance major class of Business College and Grade 2005 finance selective 4

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class of the University: Xu Yang, Hao Shinan, Zhu Lin, Yang Huilan, Su Hong, Luo Jianian, Li Juan, Qian Caiping, Sun Xiao, Ge Nana, Chen Hejing, Shi Yi, Jiang Chen, Lu Sushu, Chen Tianchi, Bi Jianchao, Ni Yiquan, Shi Yanhong, Shi Yun, Zhang Ruiping, Chen Yining, Zhang Shuowen, Shen Zhe, Chen Yifei and Doctor. Yan Xiaomin.

Wang Kangmao May, 2010

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Table of Contents ................................................................................ 9 Chapter Ⅰ Caterpillar: Devil or Angel Angel................................................................................ A. Engineering machinery industry: engine of national economy................................... 9 B. Caterpillar, a giant of the industry............................................................................. 13 C. Caterpillar pyramiding its investments in the Chinese market.................................. 16 D. Actively responding to transnational merger and acquisition....................................23 ..................................................................... 26 Chapter Ⅱ Mittal: Warning of Capital War War..................................................................... A. Detailed analysis of Mittal genes...............................................................................26 B. Mittal’s capital war strategy.......................................................................................30 C. The siren of capital war should be made................................................................... 39 D. Dealing with the capital torrent courageously and resolutely....................................42 Chapter Ⅲ Alcatel .................................................................................. 45 Alcatel’’s Battle in China China.................................................................................. A. Alcatel: a tycoon of global telecom........................................................................... 45 B. Leading the Chinese market...................................................................................... 46 C. Reviewing China again..............................................................................................60 ................................................................... 62 Chapter Ⅳ Danone: An Invader with Capital Capital................................................................... ...................................................................62 A. Danone: the boss behind the scene............................................................................ 62 B. The expansion road of Danone.................................................................................. 66 C. Danone’s localization scheme of capital invasion..................................................... 78 ...................................................... 87 Chapter Ⅴ French SEB: Enjoying a Feast of Capital Capital...................................................... A. SEB: huge market of small appliance........................................................................87 B. Casting its covetous eyes on China............................................................................87 C. National enterprises: strictly defending enterprise sovereignty................................. 97 D. Introspection: reviewing foreign capital again.......................................................... 99 .................................................................... 102 Chapter Ⅵ BMW: Fight for Control Power Power.................................................................... A. “Precious” horse leading the world automobile industry........................................ 102 B. Consolidating step by step while expanding in China............................................. 104 C. BMW reaping benefits while the Chinese party losing the power of speak............ 110 ........................................................................... 123 Chapter Ⅶ UBS: Capital War in China China........................................................................... ...........................................................................123 6

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A. UBS: “stimulus-response” type of development history......................................... 123 B. The capital control warfare in China....................................................................... 126 C. Misfortunes never come singly................................................................................136 .................................. 141 Chapter Ⅷ L’Oreal: The Battle of Brand Acquisition in China China.................................. ..................................141 A. The way of business................................................................................................ 141 B. Taking frequent actions in the Chinese market........................................................145 C. The battle between L’Oreal and P&G......................................................................150 D. Analysis of the acquisition strategy of L’Oreal in China......................................... 151 .............................................................. 155 Chapter IX Toyota: Cunning Strategy in China China.............................................................. ..............................................................155 A. Toyota China: from glory to degradation................................................................ 155 B. The development strategy in China: “triple-step jump”.......................................... 158 C. Controlling the network...........................................................................................166 D. The piggybacking strategy: Toyota hasn’t finished its layout yet............................168 E. Controversy regarding Toyota..................................................................................170 F. Having to mention: the “recalling event” of Toyota.................................................173 .................................... 177 Chapter X German Bayer: Monopoly Ambition under Varnish Varnish.................................... ....................................177 A. Bayer’s gene............................................................................................................ 177 B. Striving to start capital war and acquiring Gaitianli................................................ 179 C. Gaitianli: what to do with the “trophy”....................................................................185 D. The threat theory of transnational pharmaceutical enterprises................................ 191 .......................................... 197 Chapter XI Johnson & Johnson: Capital Plunder in China China.......................................... A. Johnson & Johnson..................................................................................................197 B. War for capital in China...........................................................................................198 C. Market monopoly war..............................................................................................209 D. Advertisement marketing war..................................................................................209 E. Price war.................................................................................................................. 211 F. Sounding alarm.........................................................................................................211 Chapter XII Coca-Cola: Different Fate due to Different Overall Arrangement between .................................................................................................................. 213 China and India India.................................................................................................................. ..................................................................................................................213 A. Unique Coca-Cola................................................................................................... 213 B. Comparison between the two major markets of India and China............................ 215 C. The competition between Coca-Cola and Pepsi...................................................... 223 7

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D. Taking the step of “sole proprietorship” in China................................................... 225 E. What have Coca-Cola brought to China?.................................................................228 F. The melee of Cokes in China................................................................................... 232 ................................................................................................................... 236 REFERENCES REFERENCES................................................................................................................... ...................................................................................................................236

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Chapter Ⅰ Caterpillar: Devil or Angel There is never an end to the expansion of capital, although capital itself can never be described to be good or evil, once combined with national interest, it will raise a wrangle of the so-called “devil or angel”. In recent years, the merger and acquisition process of domestic engineering machinery industry keeps accelerating, the main demonstration of which is domestic and overseas mergers and acquisitions by leading enterprises. In such process, overseas tycoons are more and more active in merger and acquisition in China; meanwhile, domestic engineering machinery enterprises are more and more like worldwide ones. In this chapter, I will carry out a case analysis on Caterpillar’s market expansion in China, expecting to provide a reference for seeking a way for Chinese enterprises to cope with capital giants.

A. Engineering machinery industry: engine of national economy (a) Engineering machinery: a defense crawler that can never be ignored Engineering machinery refers to all the construction machinery used in engineering construction, as necessary fundamental facilities and tools in all the links of national economic construction, which is widely used in construction, water conservancy, electric power, roads, mines, ports, national defense and other areas of engineering. There is a variety of engineering machinery, such as excavating machinery, earthmoving machinery, hoisting machinery, compacting machinery, piling machinery, reinforced concrete machinery, pavement machinery, rock drilling machinery and so on. It is just because of its wide use in economic construction that we are familiar with yet strange about the industry. We should say that engineering machinery is not a visible industry, but an important part of equipment manufacturing industry, and is playing an important role in the normal operation of national economy. No matter for developing countries or developed countries which are relatively precedent in industrialization, owning a batch of mature mechanical engineering manufacture enterprises has significant and profound meaning for the continuous and healthy development of economy and even the independence of the country. In addition, from the historic development and current situation of engineering machinery industry, it has extremely close 9

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relation to aerospace engineering or military engineering, no matter it is crawler equipment equipped in various machinery or engine system with huge power or delicate control system, these core technologies themselves are essential for aerospace or military. Therefore, the amount of technologies mastered reflects the technology strength and national defense capabilities of a country; we can have some idea about it from some examples, such as Germany which rose abruptly after the First World War, and the continuous provision of tanks in Stalin Defense War of the Second World War. In crucial moments, equipment manufacturing enterprises of a country can switch from tractor production to tank manufacture, as productions of tanks and tractors have pretty important connection with each other in core technology. Thus, no matter for companies or countries, great importance is attached to the protection of core technologies of engineering machinery. (b) International engineering machinery industry: the "phenomenon of 20/80" continues From the end of 2008 to 2009, the Wall Street Storm triggered by American subprime crisis spread to the whole world and brought about a slide to the world economy, during which period international engineering machinery industry also faced with challenge from itself, and the growth of the indutry decelerated and even recessed. When it came to 2010, the economy resurgence began to accelerate, meanwhile, the engineering machinery industry also revived gradually. Now let’s put aside the industry data of the “special year” 2009 first, and have a look at the general profile of the following international engineering machinery industries based on the statistics of 2008 only. In 2008, the top 50 engineering machinery enterprises in the world were scattered in fifteen countries of North America, Europe, Asia and Africa, with Asia ranking the first, owning 21 engineering machinery enterprises in all, then came Europe with 17, North America with 11, and Africa with only 1. The products of these 50 companies cover 17 types, including but not limited to loader-diggers, excavators with a capacity of less than 13 tons, skid steer loaders, telescopic handlers, cranes, concrete equipment, bulldozers, compaction and road building machines, land levelers, excavators with a capacity of more than 13 tons, wheel loaders, articulated dumpers, rigid dumpers, hydraulic crushing appliances, crushing and screening equipment, and so on. The aggregate sales amount was 141.537 billion US dollars, with a growth rate of 16.1% comparing with 121.935 billion US dollars of the previous year. The aggregate sales 10

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amount of the largest five manufacturers was 65.545 billion US dollars, accounting for 46.3% of that of the top 50, and with a growth rate of 0.3% over the previous year; the aggregation of the top 10 enterprises was 91.397 billion US dollars, accounting for 64.6%, and with a growth rate of 0.7%; the aggregation of the top 20 was 116.177 billion US dollars, accounting for 82.1%, and with a growth rate of 0.2%. If divided by region, the area with the largest market share was still North America, accounting for 39.9%, but which was 4.7% lower than that of the previous year; then came Europe, with a growth rate of 31.4%, which was 4.8% higher than that of the previous year, while there was no change to the market share of Asia, still accounting for 27.8%. Africa accounted for less than 1% of market share. If divided by country, the country with the largest market share was again the United States, accounting for 39.6%, but due to the quit of Ingersoll Rand, the market share was 6% lower than that of the previous year; then came Japan, accounting for 19.4%, basically the same with the previous year. Germany ranked the third, accounting for 8.5%, with a growth rate of 1.5% over the previous year, which was closely followed by China, accounting for 4.9%, with a growth rate of 1.3% over the previous year. If divided by enterprise, the enterprise with the largest market share was still Caterpillar, accounting for 20.0%, with a decrease rate of 1.4% over the previous year. There were different growth rates for the remaining four enterprises of the top 5, among which Volvo Construction Equipment ranked the first, rising from 4.5% in the previous year to 5.6% (obviously benefited from the acquisition of Road Engineering Business Division by Ingersoll Rand), the second was Liebherr with a growth rate of 0.8%, while Komatsu and Terex rose by 0.3% and 0.2% respectively. There were seven Chinese enterprises ranking top 50, which were Xugong Group, SANY Group, Zoomlion, Guangxi Liugong, Xiagong Group, Shantui and Lonking. Seeing from the ranking, the positions of Xiagong Group, Guangxi Liugong, Xugong Group and Shantui rose, among which Xiagong Group rose the fastest, from the 45th of the previous year to the 37th, Guangxi Liugong rose from 32nd to 29th, Xugong Group rose from 21st to 19th, while Shantui rose from 47th to 45th;. The positions of Zoomlion and Lonking dropped, in particular, Zoomlion dropped from 24th of the previous year to 28th of 2008, and Lonking dropped from 43rd to 46th. After analyzing the above data, we learned that the whole industry had a pretty high degree 11

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of concentration, especially that enterprises headed by the United States and Japan took up over three fifth of the overall industry market, presenting a “phenomenon of 20/80”. In addition, with the development of the market, the demand of Asia accounted for quite a large proportion in the global market share, however, other Asian countries except Japan accounted for quite small proportions in the aggregate sales, which pointed out a explicit direction for the development of the machine building industry of our country. (c) Chinese engineering machinery industry: not smooth while rising abruptly a. China gradually became a leading power of engineering machinery manufacturing The engineering machinery industry started pretty late in China. It can be said to have been developing, gaining and growing with the processes of reform and opening and marketization. Since the reform and opening policy, China has grown into a leading country of the manufacture and use of engineering machinery in the world step by step. As the economy in China keeps a high speed of development over the years, meanwhile, the large-scale development in infrastructure construction, the continuous prosperity of the real estate industry, together with China’s unique market advantage in the manufacturing industry, have all provided domestic engineering machinery with a broad market and more development space. At present, there are already more than 2000 engineering machinery enterprises and scientific research institutions in China, with a sales amount of nearly 300 billion RMB in their main business. Among the machinery industries of our country, the engineering machinery industry has grown from a small industry to the fifth industry second only to the automobile industry, the electrical engineering and apparatus industry, the petrochemical and general industry and the machine tool industry. At the same time, the production concentration ratio and brand awareness of the engineering machinery industry in China keep growing in domestic and overseas markets, the export volume of the industry was remarkably increased, in 2007, the export volume reached 8.7 billion US dollars, which was 1.76 times of the import volume, and the number of products sold was only second to the United States, ranking the second in the world. In 2008 when the global economy encountered a severe time, the engineering machinery industry could escape by sheer luck neither. The export demand stayed sluggish, but under 12

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the influence of domestic policies especially the bull news of the 4 trillion RMB economic stimulus scheme, the investments in infrastructure construction continued to increase, and the product demand of engineering machinery products remained to be high. In addition, in the long run, China has tremendous potential of sustained economic growth, all kinds of engineering constructions still need the support of equipments and technologies from engineering machinery enterprises, and it is easy to see that in a certain length of time in the foreseeable future, there will still be large space for growth of the engineering machinery industry in China. b. Significant merger and acquisition and restructuring activities are inevitable In recent years, with the adjustment in industrial policy and the speedup of the reform and opening policy, the engineering machinery industry in China has turned to be a perfect competition industry without any policy barrier. Within just a few years, private enterprises of the industry rose abruptly, engineering machinery tycoons penetrated rapidly, nearly all the famous engineering machinery companies in the world set up sole proprietorship enterprises or joint ventures in China, and there came a fundamental change to the competition pattern of the industry. It is especially worth mentioning that since 2004, under the influence of national macroeconomic regulatory policies, the engineering machinery industry entered into a special phase of development, when a new wave of industry reshuffle was conducted gradually, and there was a competition structure among foreign investments, civil capital and state-owned capital in the engineering machinery industry. At present, the engineering machinery enterprises in mainland China represent obvious characteristics of “small”, “many” and “scattered”. There are currently more than 1000 engineering machinery manufacturing enterprises in China, but only about 30 of which own a capital of over 100 million RMB each, 4 of which own a capital of more than 1 billion RMB each, and only Xugong Group owns a capital of more than 3 billion RMB. The low concentration ratio of the production in the engineering machinery industry determines that the medium-sized enterprises which are in the dry tree will finally be kicked out of the game under the impact of abundant foreign investments, and there will inevitably be large-scale merger and acquisition and restructuring activities in the entire engineering machinery industry.

B. Caterpillar, a giant of the industry 13

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(a) Caterpillar, based on the whole world Caterpillar is the largest earthwork machinery and construction machinery manufacturer in the world, and also a main provider of diesel motors, natural gas engines and industrial gal turbines. You can see Caterpillar all around from the industrial developed North America region to the vast Siberian plain, from the deep central region in Australia to the wild caves in Western China, from the tropical rain forests in South America to the broad mainland in Africa. The annual sales income of Caterpillar is nearly 50 billion US dollars, ranking between 100th and 200th among the top 500 enterprises. Caterpillar is able to be the industry giant not only because of its powerful core manufacturing technology, but also because its products represent the industrial standard of efficient environmental protection, such products include mechanical equipment used in mining, forest removing, highway building and bridging. From the very beginning of its establishment, caterpillar is much like a legend. Established in 1925, Caterpillar was set up on the basis of a merger between two tractor factories (Holt Manufacturing Company and C. L. Best Bulldozer Company), the histories of which can be traced back to 1890, when the two companies began their respective research experiments in steam bulldozers for agricultural purpose. Holt launched the first steam crawler bulldozer of the world in 1904 and successfully developed the first gasoline crawler bulldozer in 1906. These two inventions were considered to be breakthroughs of excavating transportation, and having led the mechanization revolution in agriculture and construction. More legendarily, in 1915 during the First World War, the allied countries once used “Caterpillar” crawler bulldozers manufactured by Holt. In more than 80 years thereafter, Caterpillar dedicated itself to the global infrastructure construction and kept strengthening the research and development of products, getting more and more glorious. As a large-scale transnational company, Caterpillar had placed its strategic vision on the global market since quite a long time ago. On account of the international division of labor and industry chain, the group endeavored to exploit overseas market, and about three fourths of employment opportunities of the group were distributed beyond mainland United States. (b) Caterpillar in Asia Maybe in people’s mind, the headquarters of caterpillar should be no doubt in North America. However, the fact is, as early as in 2006, the turnover of caterpillar in Asia (Asia 14

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Pacific) surmounted 5 billion US dollars (among which the sales of equipment was more than 3 billion US dollars), becoming the second largest engineering machinery manufacturer in Asia Pacific, exceeding the famous Japanese enterprises Hitachi and Shinko at one stroke. Caterpillar lays out production factories in Japan, China, India, Indonesia and Australia, with more than 8000 employees, about 10% of its total staff number all over the world. The positive market performance of the entire Asia Pacific region has become an important support of the global market performance of Caterpillar. However, capital never stops its pursuit of profit; no matter what type of joint venture or cooperation is only a way or means of realizing profit maximization. Caterpillar gradually stands firm in Asia, which makes it increasingly dissatisfied with its existing capital layout. In Japan, Caterpillar is the only non-Japanese enterprise that has obtained great success, originally it was all benefited from the joint venture SCM (Shin Cater-pillar Mitsubishi), which was established by Caterpillar and Mitsubishi, a Japanese tycoon in the engineering manufacturing industry, it was SCM that helped Caterpillar to firmly hold the second place in Japanese domestic engineering and mining machinery market. But in 2007, Caterpillar announced to buy back the shares of the joint venture held by Mitsubishi in the next five years, and to eventually hold the joint venture solely. The split-up of Caterpillar and Mitsubishi was alleged to be an advantage to their respective further development, but was in essence a strategic operation of capital for rooting in Japan and distributing in Asia as well. (c) The association between Caterpillar and China Caterpillar began to sell its products in China in 1975, when the Oil Department purchased 38 sets of oil drilling equipment from Caterpillar. In around 1980, Caterpillar started to get the right to sell its products to Chinese enterprises. In the 1990s, along with the further deregulation of Chinese market and the increase in investment attracting, Caterpillar began to extend its business in China through localized operation. During this process, Caterpillar took part in a series of large-scale projects, won excellent reputation due to the high quality and reliability of its products, and extended its market in China. Caterpillar began to invest in mainland China in 1995, when under the background of the restructuring boost of state-owned enterprises and encouragement of the reform and opening policy, Caterpillar and Xuzhou Construction Machinery Group Inc. jointly established the first joint venture. Till now, Caterpillar has already set up 11 manufacturing enterprises, and 15

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the products of them include hydraulic excavators, compactors, diesel motors, crawler units, castings, power-driven graders, crawler bulldozers, wheel loaders, electric power generators and other mechanical engineering equipment and components.

C. Caterpillar pyramid ing its investments in the Chinese market pyramiding We ought to say that Caterpillar have indeed made certain contribution to the modernization construction of China. However, it is also undeniable that the entry of Caterpillar brought huge impact on Chinese local engineering machinery industry. Especially in recent years, Caterpillar altered its original concept of joint venture, and adopted the means of merger to seize the Chinese market; the negotiation objects it planned to merge and acquire included nearly all the leading enterprises of the machinery industry in China: Xiamen XGMA Machinery Co., Ltd, Guangxi Liugong Machinery Co., Ltd, Xuanhua Construction Machinery Co., Ltd, Weichai Power Co., Ltd and so on. In this process, every act and every move of Caterpillar reflected its unprecedentedly firm determination to occupy the Chinese market. At the early phase, most of cooperation activities between Caterpillar and Chinese enterprises brought Caterpillar’s Chinese partners with unbearable memories. To a certain extent, Caterpillar compelled its Chinese counterparts to give up their own stock rights in the mutual exhaustion with its strong economic strength, so as to expand gradually in China through dealing with the original clients of the joint ventures. Along with the continuous understanding of the Chinese market, Caterpillar is no longer content with the operation model of establishing joint ventures, but shows a stronger and stronger “ambition in monopoly”: to merge and acquire and control the leading enterprises of China, and then realize the purpose of controlling the Chinese market. As is known to all, by adopting the means of merger and acquisition or participation in local enterprises, the company can not only get the production and manufacturing scale of the merged or acquired enterprises, but also make it easier to get the opportunity to enter into the local market. Merging or acquiring local enterprises is certainly the fastest and most convenient way for Caterpillar to get orders in emerging markets. Once breaking through the “bottleneck” of the market and successfully grafting with mature clients, Caterpillar will rapidly “eat off” the Chinese market through its advantages in product quality and management technology, and then achieve its purpose of industry monopoly. Based on the 16

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above analysis, it is not difficult for us to understand the logic mutation of Caterpillar’s development in China - switching from joint venture to mergers and acquisitions. In overseas merger and acquisition, Caterpillar is always famous for its model of “share holding and brand controlling”, and its rules must be followed during the merger and acquisition: any enterprise established overseas must be controlled by Caterpillar, and any competitive brand must be digested or suppressed. Meanwhile, its tough attitude in the merger and acquisition strategy in China has never changed; from the following Letter of

Investment Intent, we can see the rigorous requirements set by Caterpillar to the merged or acquired enterprises. It conducted nearly a “predatory” kind of merger and acquisition. The main content of Letter of Investment Intent can be summarized as follows:

a. The joint venture shall be conducted under and in accordance with the global strategy of Caterpillar; b. Caterpillar requests to have the ownership over the brand, emphasizes global integration and limits the use of the original brand of the merged or acquired enterprise; c. Caterpillar clearly puts forward to inject 10% of the equity capital first but exercises 100% of all the power, while the remaining equity capital will be put in place within the next seven to eight years, during which period Caterpillar will hold the remaining 90% of the stock rights in trust, and requires the merged or acquired enterprise to pay the escrow expense; d. The listed companies overlapping in advantages or products under the group Caterpillar will be reconstructed, and certain business of it will be sold in part; e. The group shall purchase technologies from Caterpillar’s research and development centers established in China; f. Caterpillar will build such enterprise to be equipped with the technology to produce Caterpillar products, and make it a production base of Caterpillar in China; g. The products of the enterprise may only be sold in mainland China, product export is restricted, and the exported products shall be labeled with the brand of Caterpillar; h. Caterpillar will limit the cooperation between the group and other competitors, and will limit the development of the existing joint venture; 17

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i. Caterpillar will cut down a large number of employees according to the management mode of transnational companies. From these terms we can easily find Caterpillar’s purpose in merger and acquisition, which is to swallow Chinese enterprises raw and whole, and completely make them its own. win-win (a) The bitter fruit of “win-win win-win””---aa painful lesson from SDEC In 1987, Shanghai Diesel Engine Co., Ltd began to produce Caterpillar 3300B series of engines according to the technology license agreement signed with Caterpillar. In 1994, both parties decided to set up Caterpillar (Shanghai) Engine Co., Ltd, which was a joint venture labeled with the brand of Caterpillar, and the first joint venture Caterpillar set up in China. Caterpillar and SDEC held 55% and 45% of the shares respectively, and Caterpillar committed to sell the products of the company abroad after the company reached a certain scale. However, in the second year after its establishment, the company encountered the global downtown of the engine industry between 1995 and 1997. During these three years, the sales of engines produced by Caterpillar (Shanghai) Engine Co., Ltd was quite dissatisfactory, with only several hundred engines a year, which was far less than the corresponding economic scale. Whereas Caterpillar oriented the engines produced by the company to be high-end based on the quality and tradition of its brand, this further intensified the deficit condition of the company under the severe market environment. Three successive years of deficit triggered fierce conflict between both parties of the joint venture. Therefore, under the pressure from SDEC, Caterpillar made concessions in two aspects: to reduce the prices of parts and to cut down the number of management personnel of the foreign party. Still such reform failed to change the situation of heavy loss incurred by the joint venture. In 1997, due to its inability to get equal decision-making and control power to the foreign party, SDEC showed its plan to reduce its shares and even gave up the joint venture, but such plan was immediately objected by Caterpillar. Finally, after some discussion by the board of directors, SDEC still decided to terminate the joint venture with Caterpillar and restored cooperation in the technology license way with Caterpillar. In retrospect, we can draw the following conclusion: if we consider the recession of the current microenvironment to be a “natural disaster”, the mistake in orientation and the over high orientation is no doubt a “man-made disaster” made by Caterpillar. As Caterpillar had 18

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precedent technology in engines, it could get the upper hand in the share distribution negotiation, and make the Chinese party a veritable “listener” or “worker”. This case reveals such a fact from another aspect that foreign investments are not “catholicon” for restructuring of state-owned enterprises. At present, some domestic enterprises believe that the injection of foreign investments is the best way to change the disadvantage situation for enterprises and the most worthy of seizing “life-saving straw” during the restructuring process. In their opinion, by this way, the problem of capital will be resolved on the one hand, and advanced operation management modes and technologies will be brought about on the other hand. However, it is worth mentioning that one failure in investment may be no big deal for large enterprises such as Caterpillar, but for some state-owned enterprises, “one false move may lose the game”. —a sigh of Xugong (b) Well planned defeat defeat— In the 1990s, Caterpillar began to look for production bases in China, and the initial goal of it was Liugong. However, at that time Liugong was listed and had put large investments in research and development, and the company gradually had global advanced equipment. With such strengths, during the negotiation with Caterpillar, Liugong held firmly the market, manufacture, research and development, and insisted on not giving the foreign party any tariff preference to the import of parts. After the setback in the negotiation with Liugong, Caterpillar found Xuzhou Construction Machinery Group Inc. (hereinafter referred to as “Xugong”). In 1995, Xugong and Caterpillar established Caterpillar Xuzhou Limited, a joint venture to produce hydraulic excavators, with the shareholding ratio of 40:60 between the Chinese party and the foreign party. At that time, Caterpillar had laid down three principles for cooperation: firstly, it must hold enough shares to control the company; secondly, the power of sale must be attributed to Caterpillar; thirdly, the holding company may not have independent technical ability or products, but could only be committed to Caterpillar. The fate of Caterpillar Xuzhou Limited was almost a reproduction of Caterpillar (Shanghai) Engine Co., Ltd which also lost money for three consecutive years. In around 1997, Caterpillar required Xugong to pay the second phase of investment, when Xugong Group had no sufficient money; in addition, the annual output of the joint venture was merely 19

Capital War

several hundred sets of machine, which was far from gaining profit, thus there was no need to expand the share capital. Xugong could not help but sell more than half of its 40% of shares, with 15.6% of shares left, basically lost the right to speak in the joint venture. In June 2008, Xugong officially announced to quit from Caterpillar Xuzhou Limited after 14 years of cooperation, and to establish its own production enterprise of excavators. We can say that the only loser in the cooperation was Xugong, which got neither technology nor basic investments from Caterpillar. The strategies adopted by Caterpillar in this process of joint venture are worth thinking deeply about. Caterpillar earned a lot even from parts in the early phase of investment, while Xugong invested in it through bank loan. When Xugong was not able to pay the second installment of investment, Caterpillar unceremoniously “fished in troubled waters bluntly”, causing the shareholding ratio squeezed under 15%. In other words, Xugong didn’t earn much money in the business, but it was Caterpillar who occupied the Chinese market firmly since then. —merging “Shangong ” (c) Incredible good deal deal— Shangong” The merger of Shandong Sem Machinery Co., Ltd can be deemed as the first victory of Caterpillar’s consolidation plan. On October 19, 2004, the signing ceremony of Caterpillar merging Shandong Sem Machinery Co., Ltd was held in Shandong Hotel in Jinan. The name of the new company Sino-American joint venture Shangong Machinery Co., Ltd afforded much food for thought, especially the words “company invested by Caterpillar” was impressively written in the bracket under the name. Due to the pretty small volume of business, the exact amount has not been released so far. It could be said to be an “incredible good deal” for Caterpillar to purchase 40% of the shares of Shandong Sem Machinery Co., Ltd with less than 2 million RMB. Shangong Machinery Co., Ltd was a state-owned enterprise with a history of more than 40 years, and with its shares mainly held by Shandong Sem Machinery Co., Ltd. The advantage of it lied in leading technology research and development in the country, and more importantly, in its perfect product supporting system and normative agent network. In March 2003, Shangong Machinery Co., Ltd was officially restructured into a half-private company, the shares of which were held by the management and employees. After the restructuring, 20

Capital War

20% of the shares were held by the state, 60.5% were held by the management layer, and the remaining 19.5% were held by excellent employees. We can say that the restructuring of Shangong in 2003 provided Caterpillar with convenience. Half a year after the restructuring, Caterpillar positively talked over merger and acquisition with Shangong. The sale price Shangong asked was 22 million RMB, but finally, Caterpillar purchased 40% of the shares of Shangong Machinery Co., Ltd with 2 million RMB through its negotiation tricks. Over the years, Caterpillar had always been in the first place of the global wheel loader market, the annual output of which was over 12000, second only to the sale of its excavators. However, as the related products were of high quality and low price in China, and the technologies were improved quickly, the sale of wheel loaders in China was severely challenged, while domestic leading enterprises such as Liugong and Xiagong almost accounted for 100% of the market share in the loader market. Therefore, under such circumstance, Caterpillar came up with an idea of merger and acquisition, namely, to acquire the competitive opponents of China with its abundance capital; therefore, it could not only weaken the challenge to its dominance from Chinese opponents, but also facilitate itself for entering into the engineering machinery market in China. (d) New tendency of Caterpillar In 2008, China experienced the storm of “3·14” event, encountered the pain of Wenchuan Earthquake, and also realized the Olympics Games dream, when could be said to be a remarkable year. Meanwhile, for Caterpillar, 2008 could be deemed as an important year for its layout and development in the Chinese market. At the end of August 2008, with the driving force of Olympic, Owens, the president and CEO of Caterpillar which was the biggest construction engineering machinery manufacturer in the world, held a large scale and high-level press conference in Beijing. In the conference, Caterpillar actively announced its target in China in 2010, which was to strive to double the sales quota of about 2 billion US dollars of 2008, namely, astonishing 4 billion US dollars. Since 2008, Caterpillar had taken frequent movements, first announced to produce world-class small size (with a capacity of less than 20 tons) of hydraulic excavators in Nanjing, Jiangsu, then located its headquarters of West Region in Chengdu, Sichuan, and even added millions of US dollars to Shangong for capacity expansion. In order to match 21

Capital War

with the rapid development of business in China, Caterpillar even set a multi-function research and development center in Wuxi of Jiangsu, which focused on product and process development, product localization and verification, and technical training. The R&D center had multiple functions, including an engine technology research center which was equipped with the development ability in performance and discharge technology, an electronic appliances laboratory and an integration section of system and machines; meanwhile, it was equipped with product verification ability. The center was built in phases, and the first phase was basically completed at the end of 2009. It is no exaggeration to say that the final completion of Wuxi Asia Pacific R&D Center would definitely become a landmark milestone in Caterpillar’s business expansion in China. It is worth noting that with its rapid distribution in China, Caterpillar was also good at handling with public relations. After “5·12” Wenchuan Earthquake in Sichuan and “4·14 Earthquake” in Yushu of Qinghai, Caterpillar and its agents in China actively participated in the disaster relief work and post-disaster reconstruction. Caterpillar launched “master operator training program” for the masses in the disaster areas so as to promote the reconstruction and solve the re-employment problem for the survivors, which lasted all along from May 2009 to January 2010. Establishing an excellent image of foreign invested enterprise and creating a harmonious and loose media environment for seizing the market could be said to be a strategic link for Caterpillar’s capital expansion in China. (e) Strengthening its market position by “remanufacturing” “Remanufacturing” is an important part of the manufacturing industry, and as it is favorable to the recycle and reuse of resources and environment protection, it is highly praised by developed countries. Caterpillar is a construction and mining parts manufacturer with leading technology, which also provides the auto industry, the national defense industry, the electronic industry etc with reproducing service. At present, Caterpillar Remanufacturing has owned 18 factories, 160 production lines spreading in seven countries of North America, Europe and Asia-Pacific. After years of accumulated experience and a large amount of R&D investments, Caterpillar Remanufacturing accumulated rich competitive advantages, and had unique repair technology, mature reverse logistics system, sophisticated quality control and after-sales service system. Caterpillar Remanufacturing Services (Shanghai) Co., Ltd put into operation as early as July, 2006, and then launched the second phase of project in September, 2007. 22

Capital War

Caterpillar was deeply in love with the huge market prospect of the remanufacturing market in China, it even signed a letter of intent regarding joint development of the remanufacturing industry based on industrial investment, and organized and held many seminars to preach the concept, operation modes, related industrial policies of remanufacturing and specific conception of remanufacturing industry development in China to government officials and industrial peers. Caterpillar was well aware of the market opportunities in the remanufacturing industry in China. According to the analysis by industry experts, after entering into 2000, the existing large scale sets of engineering machinery equipment in China went out of service in succession, and such phenomenon reached a peak around 2010; the market scale of remanufacturing in China could be around 10 billion US dollars, accounting for about one tenth of the global total shares. Caterpillar actively catered to the environmental protection industry development policies set by Chinese government, and stressed repeatedly that the manufacturing industry could save energy and materials, and would significantly reduce its negative impact on environment, so as to promote construction of a resource-conserving, environment-friendly society. Therefore, although it was difficult to obtain rich economic profit in a short term, in the long run, especially from the aspect of consolidating its market position in China, Caterpillar did not hesitate to input a large amount of money and tremendous energy in order to cultivate a remanufacturing consumption culture with a “whole life cycle”.

ing to transnational merger and acquisition D. Actively respond responding The capital war has already begun, in the previous fights with Caterpillar; our engineering machinery industry experienced unprecedented challenges and paid significant price. This war is proved to be just a prelude - Caterpillar is attacking by using a nearly choking offensive situation and swallowing the growing engineering machinery industry in China. Meanwhile, Caterpillar’s aim can be way from being satisfied by Shangong, but a long list of names such as Xiagong, Liugong, Weichai and so on are the further “preys” of attack for Caterpillar. In front of the Chinese market, the emerging market full of vigor and business opportunities, Caterpillar’s purpose is already quite obvious: to hold enough shares to control the enterprises, to limit the use of their original brands and to decline non-performing asset; Chinese enterprises would only be production bases under Caterpillar’s global strategies, and Chinese engineering machinery market would only be part of its integration. 23

Capital War

While China’s economy presents a strong momentum of development, engineering machinery has and will have broad market prospect. More importantly, as an important part of the equipment manufacturing industry, the engineering machinery industry has important and profound strategic significance. Facing Caterpillar’s aggressive oncoming force, our enterprises shouldn’t “sit there still waiting for death”, but should actively respond to this war of the century, the result of which will decide the fate of the entire engineering machinery in China. Facing this wave of mergers and acquisitions, we could fight back positively by several means, including but not limited to: (A) Formulating adaptable development strategy We have to further specify our own competent industries, and seek for new market provided that we have already done pretty well in our competent industries. Governmental departments at all levels should map out the industry development as well as promote and deepen enterprise reform based on the overall layout of the industry. A more cautious attitude should be adopted in regard to foreign investments involving in strategic industries and key leading enterprises; meanwhile, for foreign investments involving in merger and acquisition and restructuring, the government should interfere positively, as the engineering machinery industry is closely related to not only the common people, but also national security, we should be double cautious; under the circumstance that the short term interest is prone to raise, we shouldn’t blindly hope for the best to avoid gaining immediate benefits at the price of long term interests. (B) Insisting on “self-directed self-directed”” in negotiations “Being Cautious” doesn’t mean to refuse the entry of foreign investments, but to positively control the timing of the entry and to cautiously consider the consequence of such entry, so as to maximize our own interests. The premise of equal negotiation is improving the ability of self-innovation. Only after we have realized a certain scale and accumulated the ability of technological innovation can we grasp the initiative in negotiation firmly. And only if we stay independent and develop ourselves in joint venture cooperation can we achieve long-term mutual benefits. (C) Formulating and perfecting relevant laws and regulations to avoid the transnational giants from doing whatever they wish The adoption of the Anti-monopoly Law of the People's Republic of China would probably 24

Capital War

present certain suppression on these transnational enterprises which raise the devil in China in some areas; however, in contrast to developed countries in Europe and America, we have done far from enough in these aspects. Therefore, we should establish a relatively perfect review mechanism as soon as possible, under which significant merger and acquisition and restructuring activities shall go through repeated evaluation and inspection by relevant experts and related agencies before actual execution. This level of caution is necessary, as once such a leading enterprises falls down, the whole industry will lose its stronghold.

25

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Chapter Ⅱ Mittal: Warning of Capital War Industry circle and capital market, or industry and capital, are a natural couple under the context of Political Economics, which not only supplements and complements each other but also helps each other forward. As a tycoon in industry circles, once combined with capital, the steel industry will burst out infinite power. Mittal is exactly such an enterprise. It hunts around with capital, launches one after another capital wars, and seizes one after another commanding heights. This Indian enterprise gradually strengthens itself by acquisition, merger and other non-traditional manners, and then gobbles up one after another “preys”. This article analyzed the genes, the development mode of Arcelor Mittal and its two “capital preparation wars” in China, so as to give out a warning indicating that Mittal would raise a capital war in China.

ed analysis of Mittal genes A. Detail etailed Maybe we won’t connect India with industry, but Mittal is exactly such a steel enterprise with Indian genes. The full name of Mittal is Arcelor Mittal, the predecessor of which was Mittal Steel Company merged from Lakshim. N. Mittal (LNM) and Ispat International. In 2006, Mittal officially changed its name after acquiring Arcelor, the largest steel group in Europe. Mittal is the name of its founder. In 1957, father of the current chairman of CNM Lakshmi Mittal established a small steel rolling mill in India. Later, as the Indian government restricted private enterprises from stepping into the steel industry, old Mittal set up a small steel rolling mill with an annual output of merely 65 000 tons in Indonesia in 1976 and asked 19 years old Lakshmi Mittal to supervise the mill. Subsequently, Lakshmi Mittal set up an EAF steelmaking plant with an annual output of 300 000 tons in Indonesia. In 1989, in order to get cheap raw materials, Lakshmi Mittal acquired a state-owned steel mill which was under deficit in Trinidad and Tobago, and turned losses into gains within just a year. From then on, he established the operation way of merging and reforming state-owned enterprise under deficit. Throughout the 1990s, Mittal experienced a series of acquisitions and mergers, constantly capitalized steel and continuously won landslide 26

Capital War

victories in capital wars. In 2006, Mittal conducted a hostile takeover with Arcelor, the largest steel group in Europe, and finally became the largest steel group in the world The scale of Mittal after such acquisition exceeded the second largest “Nippon Steel”, and exceeded the summation of the third largest “Pohang Iron and Steel Co. Ltd” and the fourth largest steel group. Meanwhile, Mittal had the largest market share in the steel market. It operated business in 14 countries such as the United States, Canada and Mexico, with 165 000 employees in total. (a) Gene core: Lakshmi Mittal Despite of the global economic downturn, Lakshmi Mittal still ranked the eighth, with 19.3 billion US dollars in the assessment of global wealth declared by Forbes magazine of the United States. Mittal could not be regarded as a family enterprise, but an Asian enterprise, we can not ignore the core function of entrepreneurs. Mittal was born in Rajasthan, India in 1950. As the eldest son of the family, Lakshmi Mittal left his father’s family enterprise in 1975, but still stepped into his father’s footsteps and established his own small factory named Ispat Indo. Lakshmi Mittal was as introverted as typical Asian people. He did not talk much, but studied very hard, and had set up his lofty ambition since very young. In elementary school, the words he carved on the ruler were not his name, but “Doctor Lakshmi Mittal, Bachelor of Commerce, Master of Business Administration and Doctor of Business Administration”. Mittal has typical Asian cost concept and diligence. In college, Mittal went to school in the morning, went to work in his father’s company, and went home to review his lessons at night. He said that working hard was “no big deal” for him. “I would rather work than take a vacation” was his belief. Nurtured by the hardworking and thrifty Asian culture, Mittal also took low cost as an important strategy of enterprise development. As he worked overseas for a long time, Mittal was “westernized” to a large extent. He became a London resident and was blended in Western life since 1995. According to the related report, Mittal purchased an apartment in west London with 130 million US dollars, and spent millions of US dollars for the wedding of his only daughter, including the luxury party attending by 1500 people in Versailles Palace.

27

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However, his Eastern spirit as a core would not be changed so easily, which was reflected in his operation principle and manner. In general, Mittal could be deemed as a combination of the East and the West. (b) “Hardworking and thrifty thrifty”” being the top priority Mittal has a typical character of Asians, hardworking and thrifty. This was also deeply imprinted in Mittal Steel Group. In particular, it manifested in doing the most things with the least cost. We could say that, from the very beginning, low cost was a strategy of Mittal, which could be divided into two parts of content. The first was replacing Greenfield investments with merger and acquisition, Mittal began expansion from merging and acquiring enterprises that were on the brink of bankruptcy; the second was the technology of “using a corpse to resurrect a dead soul”, Mittal brought one after another enterprises “back from death” relying on his Asian nature of hardworking. Mittal was best at performing operations on the acquired steel enterprises: “Mittal is a truly global steel producer and we can provide all the required professional knowledge to the acquired companies which have so many problems.” From this, we seem to see a vague image of a common Asian family workshop. However, the essence of such strategy was a “capital oriented” vision. This kind of capital pursuit could be said to be the best interpretation of “capitalist spirit” named by Max Weber on Mittal. The unremitting pursuit of profit was the most “non-Asian” part of this Asian enterprise. Mittal once said: “I want my steel company to be with the highest profits in the world, not just with the most output.” In conclusion, Mittal’s mode can be summarized as “merger & acquisition plus ‘using a corpse to resurrect a dead soul’”. Certainly, it can be described as a non-typical Asian growth mode of “steel plus capital”. (c) “Mittal-type Mittal-type” of mode, the profit edge tool Mittal’s career begins with continuously capturing of opportunities, and once it seizes an opportunity, Mittal will no longer be willing to let it go. In a sense, it is one of Mittal’s features to hold the trump card. Inside Mittal group, there are quite a few most excellent resources and technologies in the world. For example, Romanians take the lead in blast furnace technology, and Poles are 28

Capital War

leading in hard coke production. Mittal group is also controlling 40% of the iron ore resources it needs, and is even self-sufficient in hard coke. When these resources could no longer be purchased in reasonable costs, Mittal was quite determined: we’ll just use our own resources. Mittal not only paid attention to mastering of superior resources, but also attached importance to the integration of resources. He even specially invited consultants from McKinsey to ensure that the company acted perfectly in the integration of internal resources. Mittal often acquired factories from emerging market and remoulded them, and maybe we could have a peep of its style from the “surgery” case of Poland factories. After the dramatic changes in Eastern Europe, there were some large-scale steel enterprises under planned economics system left. Facing with the unemployment of tens of thousands of workers, the Polish government wished that certain company could purchase its steel factories. At the end, Mittal defeated an American steel company and obtained the controlling stake of Poland factories with 350 million US dollars, becoming a controlling party of the combination of four independent companies which were on the brink of bankruptcy. As a premise of acquisition, Mittal assumed 1.27 billion US dollars of debt and promised to inject more capital. Mittal appointed a special task team consisting of 15 members to Cilicia, Poland, most of who were Indians. The first priority task of the team was to reassure the public, as these Poland factories were unable to provide enough cash for their suppliers and employees, and a large amount of debt collection letters flew into these factories every day. Mittal injected 100 million US dollars as emergency funds. The recently appointed CEO of the company began to contact with the furious suppliers and call for rebuilding trust; at the same time, the marketing director reformulated the price strategies, repositioned the new client base, and caused the highly profitable varieties of products including cold rolling steel and galvanized steel to decline. The new management of the company combined the sales business of Porish factories with that of Mittal’s factories in the Czech Republic, so as to avoid internal competition. As a result, the number of workers of the factories was cut from original 14,500 down to 10,000. Actually, the Mittal model was mainly based on the common sense of commercial practice. Indian did not and didn’t have to teach Poles and Czechs how to forge steel, what Mittal brought were management tricks of business field and its deep and unique understanding of the global market. Allegedly, the reformation made by Mittal brought with wonderful effect, 29

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the Poland factories realized profit in the ninth month after they were acquired, and the gross profit of that month was as high as 121 million US dollars.

B. Mittal Mittal’’s capital war strategy In many people’s opinion, there are only Western enterprises occupying Eastern battlefield, but never any Eastern enterprise defeating Western enterprises. Mittal was really dfferent, which used its powerful capital weapon making the Western enterprises one after another chess pieces of its global layout. It was such a non-typical Asian enterprise which often dealt with things in an abnormal manner that after becoming aware of the benefits of acquisition for the first time, Mittal promptly started the processes of capital accumulation and capital war. Some analysts considered that, Mittal extended the integration of the steel industry from the internal of the area to the whole world, and changed the balance of strength between global steel manufacturers, the “steel kingdom” he created had stronger pricing ability in front of raw material suppliers and downstream customers. Mittal expected that in the next few years, there would be similar mergers in the global steel industry. For the time being, he is turning his eyes onto the East. “We have little business in Asia,” said he, “This is obviously where we want to expand.” (a) Battlefield and weapons The expansion of Mittal’s capital battlefields can be divided into three phases. The accumulation phase when “sleeping on brushwood and tasting gall” between 1989 and 2002, the “coronation” phase between 2002 and 2005, and the “global conquer” phase after 2005. The table below collected and listed the main campaigns of Mittal during these three phases: The Phase

Year

Acquired

Enterprise/the

Host

Reason

Acquisition Price

Country National

Sleeping on brushwood and

tasting

1989

Steel/

The

Republic of Trinidad and

About Deficit

Tobago

100,000,000 dollars

30

US

Capital War

gall 1992

Sibalsa Steel/Mexico

1994

Sidbee-Dosco /Canada

1995

Irish Steel/Ireland

1995

1995

1997

Hamburg Steel/Germany

Karmet/Kazakhstan

Walgdraht

Hochfeld

/Germany

(Mittal went public in and

New

US

dollars

To enter into the North America

About 500 to 800

market

million US dollars

Bankruptcy

1 Irish pound

The

fourth

largest

wire

rod

producer in Germany

Bankruptcy /Privatization

Rwhrort,

Amsterdam

220,000,000

Lockout

To expand the scale of Germany market

About less than 1,000,000,000 US dollars 500,000,000

US

dollars

About 500,000,000

US

dollars

York

1998

Inland Steel/U.S.A.

The sixth largest steel enterprise in America

1,430,000,000

About 1999

Unic Metal/France

To expand the European market

1,000,000,000 US dollars

2001

Sidex/Romania

Privatization

2002

Iscor/South Africa

Deficit

31

360,000,000

US

dollars Over 100,000,000 US dollars

Capital War

About 2003

Nova metallurgy /Czech

Bankruptcy / privatization

100,000,000

US

dollars

2004

Coronation

2004

2005

Global conquer

1,050,000,000 US

PHS/Poland

Bankruptcy / privatization

International Steel Grou

To exceed the current Arcelor in steel

4,500,000,000 US

p Inc. /U.S.A.

yield

dollars

Hunan Valin Steel Tube & Wire /China

2005

Kryvorizhstal /Ukraine

2005

Stelco / Canada

2006

Arcelor/ EU

2006

Sicartsa /Mexico

Joint stock reform

Deficit /privatization

To monopolize the North America market

dollars

2,600,000,000 RMB 4,500,000,000 US dollars

C$1,100,000,000

To complete the transition to the first

34,300,000,000

in steel industry

US dollars

The abundant iron ore reserve

1,439,000,000 US dollars

From the above table, we can conclude three different “weapons” used by Mittal in acquisitions. a. Oriented by controlling upstream resources. This was especially obvious in the “sleeping on brushwood and tasting gall” phase, when it acquired some defective or bankrupt enterprises; in particular, it seized the opportunity of privatization in some Eastern European countries, and obtained some enterprises which were of low quality yet with many upstream resources. Mittal controlled 40% of the iron ore resources it needed, while it was self-sufficient in hard coke. When these resources could no longer be purchased in 32

Capital War

reasonable costs, Mittal would use its own resources. b. Oriented by expansion of market. This was especially obvious in the “coronation” phase, including the acquisition of Valin Steel, Mittal was no long limited to acquisition at a low price, but paid more attention to whether the acquisition could help to open the door for its global expansion. Valin Steel had certain market share in the South China market, and the economy was developed in South China, having a great demand of steel, so Mittal occupied certain market through acquisition again. c. Oriented by strengthening itself. Although Mittal paid more attention to profit than yield, it could not put the latter aside, which was reflected in the mergers and acquisitions of Inland Steel and International Steel Group Inc. in the U.S and Arcelor, namely, to consolidate its dominance. (b) Opening up battlefield in China Mittal had always been quite interested in the Chinese market. He had great ambitions in occupying the battlefield in China. According to Mittal, the demand for steel from the market in the next ten years would increase, especially under the promotion of such an emerging market as China. Within foreseeable time, the increasing rate of steel demand would stay in a relatively healthy state, which was between 3% and 5%, and the main source of increase came from China and some other Asian countries. However, opening up China battlefield seemed not as easy as that of other battlefields, we could even say that Mittal was not successful in the trip in China. At the very beginning, Mittal put its focus on the large-scale state-owned steel enterprises in China; however, Mittal was vigorously rejected by Bao Steel when it attempting to acquire the latter, and Ba-Yi Steel, Kunming Iron & Steel, Baotou Iron & Steel and several other domestic steel companies which Mittal planned to acquire also changed Mittal’s intention to ally. So Mittal could only choose to “save the nation through twisted means”, that is, to commence from the second tier of steel enterprises in China. Because they were enterprises or private enterprises controlled by local government, it was easier for Mittal to penetrate. It was a big breakthrough for the company to get part of Valin’s stock rights in 2005, and the subsequent acquisition of China Oriental would not be Mittal’s last investment in Mainland China. The first battle: Mittal VS Valin Group 33

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Valin Group was a large-scale enterprise group jointly established by the top three steel enterprises in Hunan (Xiangtan Iron and Steel, Lianyuan Steel and Hengyang Steel) at the end of 1997, the biggest state-owned enterprise in Hunan. The steel output in 2004 was 7.13 million tons, achieving sales revenues of 26.2 billion RMB; the steel export amount was 830 thousand tons, earning foreign exchange of 400 million US dollars, quite clinging to those of Anshan Steel and Bao Steel. The annual production capacity of Valin Group and its holding company Hunan Valin Steel Tube & Wire reached 8.5 million tons and its market value in Shenzhen Stock Exchange reached 8 billion RMB. Meanwhile, Hunan Valin Steel Tube & Wire was the biggest production enterprise specializing in wire rods, seamless steel tubes, deformed steel bars and copper coil tubes, and it also occupied the most market share of minor-caliber seamless steel tubes across the country. Mittal expressed that Valin Group had unique charm, as it thought highly of Valin’s equipment, asset, efficiency, variety structure, management level, labor cost etc, and Valin Group was extremely similar to Mittal in strategy development idea. The acquisition was mainly derived from the joint stock reform of state-owned enterprises, which needed to introduce strategic investors. The reform of Hunan Valin Steel Tube & Wire was led by Hunan Provincial Government, and was controlled by relevant government personnel from the determination of investors in the early phase to negotiation and acquisition. While Mittal had an excellent government public relation ability and abundant relevant experience, he employed a professional public relation company and conducted extensive personal lobbying, who even moved the group headquarters of Mittal to London, so as to persuade the French government which had veto power over the acquisition. Thus, it could be imagined that Mittal took much time and energy on government public relations for the successful acquisition. However, Mittal got no complete victory over this war. Before the acquisition, according to the will of Hunan Provincial Government, Mittal would hold 28% of Valin’s stocks and become the second largest shareholder of Valin, but which proposal was opposed. Later, after the compromise between both parties, Mittal acquired 37.17% of Valin’s state-owned legal person shares, and shared the first place of shareholder with Valin Group. As there were some provisions which set a limit to foreign investors in the Policy for Iron and Steel

Industry enacted subsequently, Mittal again reduced some shares. Afterwards, on December 18, 2007, China Securities Regulatory Commission approved that Mittal could subscribe

34

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almost half of the additionally issued shares of Hunan Valin Steel Tube & Wire at the same time. After the subscription, the shareholding ratio of Mittal rose from 29.19% to 33.02%, but Mittal remained the second largest shareholder. However, besides opening up the Chinese market, the biggest gain in this acquisition was changing material supply of Valin to mainly leaning on import, thus the upstream resources were controlled, and space was left for transferring pricing and profit shifting. The second battle: Mittal vs. China Oriental Group This battle was not s resounding as the first one, but was much more successful. China Oriental Group was a private enterprise reformed from a state-owned enterprise and experienced management by-outs, the products of the group were mainly billets, steel bars, H-shaped steel, cold rolled steel and galvanized steel bars. Jinxi Iron and Steel, a subsidiary of China Oriental Group, was one of the largest producers and suppliers of billets in China, the products of which were mainly supplied to downstream steel producers. As of the end of 2003, the company had reached a steel production capacity of over 3 million tons. The second battle mainly originated from the contest for power and profit among the internal shareholders of China Oriental Group. It was “a snipe and a clam locked in a combat” that helped Mittal. In April, 2007, Chen Ningning, the second largest shareholder of China Oriental Group, who was known as a “steel princess”, launched a hostile acquisition, but was strongly resisted by the current largest shareholder Han Jingyuan and the entire management of the company. At last, Chen Ningning was dismissed by board motion. On October 29 that year, China Oriental Group held a special meeting, on which Chen Ningning was dismissed from the position of director at the voting ratio of as high as 64.31% by the shareholders attended. Then, Chen Ningning needed to sell 817 million shares of China Oriental Group she held, accounting for 28.11% of the total equity number. Chen Ningning immediately contacted with Mittal to talk about acquisition. On November 7, which was less than ten days from October 29 when Chen Ningning was dismissed, Mittal explicitly expressed that it would acquire about 28% of stock rights from Chen Ningning at the cost of 647 million US dollars, namely, about 6.15 Hong Kong dollars for each stock, which was about 13.95% at a premium compared with 5.4 Hong Kong dollars before the listing suspension of China Oriental Group.

35

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Differently from Valin, as China Oriental Group was a private enterprise, Mittal encountered little resistance from it while acquiring, according to the Policy for Iron and Steel Industry, the state explicitly prevented foreign investments from controlling state-owned steel enterprises, but didn’t forbid foreign investments from investing in private steel enterprises or seeking for holding private steel enterprises. On December 13, 2007, Mittal announced that it had concluded a shareholder agreement with the holding shareholders of China Oriental Group, according to which Mittal would acquire 45% of the current shares of China Orient Group in an agreed period, and become a substantial large shareholder of China Oriental Group without violating the domestic policies for iron and steel industry. Through the above shareholder agreement, Mittal would raise its shareholding proportion of China Oriental Group to 73.13%, thus it could be expected to become the first foreign funded enterprise to hold a Chinese funded steel enterprise. Of course, same as Valin, Mittal had controlled the procurement of iron ore and coal of China Oriental Group, and grasped firmly of its upstream resources. Han Jingyuan, CEO of China Oriental Group, expressed in an interview that, in his opinion, if Mittal was willing to provide China Oriental Group with the best technologies and relatively cheap resources, and allow the company to resume a long-term development, it was no bad thing to exchange with the shares held by China Oriental Group. (c) Mittal without unalloyed success From these two important battles and the failures in merging and acquiring Bao Steel, Baotou Iron & Steel and other enterprises, Mittal played not so well in the battles in China; though holding the philosophy of “100% share acquisition”, Mittal won no unalloyed success in China. In 2004, Mittal invested 1 billion US dollars in order to set up a cold rolling coating film factory with a capacity of 400,000 tons in Yingkou. However, “This investment was almost with no gain back”, said one insider of Hunan Valin Iron and Steel Group who was familiar with Mittal. It was said that Mittal would hold China Oriental Group pretty soon, but actually, Mittal is only holding 28.02% of the shares currently, although Mittal has obtained the right to acquire the shares of holding shareholder, whether Han Jingyuan, CEO of China Oriental Group would transfer his 45.11% of China Oriental Group shares depends on how much interest the acquiring conditions offered by Mittal will bring about to the company. Meanwhile, the related transaction will be valid only after obtaining antitrust approval from 36

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Ministry of Commence and State Administration for Industry & Commerce of China. As to our analysis, there are mainly two reasons why Mittal failed to get unalloyed success: First, Chinese privatization was relatively slow compared to that in East Europe, China didn’t let privatization go out of control at a stroke, and there were also some restrictions. During the reform process of state-owned enterprises, the government was fairly strict in holding the pass, generally speaking, 100% acquisition with one stroke wouldn’t happen. In addition, the Policy for Iron and Steel Industry also set a limit stating that “in principle, foreign investments should not hold domestic enterprises”. Second, there was fairly strong economic nationalism concept and economic strength in domestic enterprises. For a long time, the domestic steel industry was inimical to foreign investments, as this meant a touch with the existing interest structure, which was not only a scramble for upstream resources, but also a preemption of downstream market. Therefore, domestic enterprises tended to increase industrial concentration through restructuring between strong domestic funded enterprises. (d) Thorough analysis of Mittal mode We have discussed about the capital war of Mittal, including two domestic significant battles. From the war process of Mittal, it is not difficult for us to see the important mode differences between Mittal as an Indian enterprise in a developing country and enterprises in Western enterprises. a. Greenfield investments will never be considered Mittal seemed to have achieved the purpose of deployment for advantage in the world without setting up any overseas branch. There implies such a logic that, the basic amount of capital for enterprises in developing countries is too small to meet with the threshold of Greenfield investments, thus Brownfield investments with lower threshold will be adopted instead, i.e., conducting stock consolidation to the capital in target countries through mergers and acquisitions. Of course, it is not just a pure “consolidation”, but getting new base amount, and thereby obtaining the basis of increment. And this manner of obtaining base amount can be divided into several phases. In the first phase, small amounts of capital are consolidated in batches, namely, bankrupt 37

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enterprises are acquired, and as such enterprises are already in insolvency and the owners are eager to sell them out, the acquisition prices will be extremely low. In the second phase, increment is obtained after operating the stock of consolidated small amounts of capital, and then large amounts of capital are consolidated with the added stock. When the capital stock of such enterprise reaches a certain number, it will be easier for the enterprise to acquire large enterprises in Europe and America which are with outstanding performance, and the negotiation ability for the enterprise is also improved. Thus, a circulation pattern of “consolidating small amounts—adding stock—consolidating large amounts” is formed, with which enterprises can easily occupy the markets in different countries without striking a blow, in the meantime, the risk of Greenfield investments is shifted and the cost of foreign direct investments is reduced. b. Centering on cost all the time In his book Die protestantische Ethik und der Geist des Kapitalismus, Weber described the American spirit of capitalism to be a concept of pursuing capital appreciation under the guidance of “glorifying God” of Protestantism. With such concept, people mainly operate on the basis of currencies; pure capitalized behaviors such as gaining interest from loans are out of the profit oriented concept. But in contrast, the “Asian capitalism” reflected from Mittal embodies another orientation. First, there should be a concrete carrier for capital, such as industry. Accordingly, Mittal used steel enterprises as a carrier of capital operation. Therefore, capital wars in developing countries not necessarily occur in the capital market, but may also appear in the first or the second industry. Second, Mittal operated by centering on cost, which is totally different from Western enterprises, the latter will only operate for profit’s sake, and will add profit through continuously increasing proceeds. In the contrary, Mittal controlled cost reversely, merged and acquired cheap enterprises, cut down the operation cost and reduced organizations. As the proverb goes, Mittal was especially good at “bargaining”. John Lefler, senior management personnel of Sparrows Point steel works, a subsidiary of International Steel Group Inc. (ISG) acquired by Mittal, said: “I had to submit 66 reports every month. But before the acquisition, 6 reports were enough. I had to correct to the details of every procedure such as how much gasoline was used, how much power was consumed 38

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every hour and how much time did the maintenance take. Moreover, they would come forward and ask: why was your consumption level higher than that of factories in Kazakhstan? Consequently, we had to try to find the reason for their excellent performance in work.” This concept of centering on cost may have positive effect in the early phase of enterprise development, but once when the enterprise begins to operate stably, it is to the disadvantage of the stability of the enterprise, and especially so to the protection of employee incentive. c. Irrational expansion As part of enterprise growth strategies, it is important to expand the scope of operation. And the expansion, especially the global expansion of Mittal, shows a unique “irrational expansion way” of developing countries or Asian enterprises. Entrepreneurs in developing countries generally lead poor and difficult lives since childhood, for instance, at the place where Mittal was born, which was a small village in Western India, there was no lighting until 1960s. Meanwhile, at the early phases of growth, their enterprises tend to be surrounded and even extruded by many large enterprises, so they are lack of sense of security, which causes a vindictive mentality and a value of undesirable expansion. “Risking their lives” can be said to be a unique comment for Asian enterprise culture. Mittal himself also had such characteristics, as described above, Mittal was ambitious since he was very young, and this perceptual way of thinking also affected his global strategy. From the above table, we can see that since 1989, Mittal seems to have never stopped even for a moment; he didn’t leave the enterprises with certain adjustment and stationary phase, but conducted one after another acquisitions with his capital. However, “using a corpse to resurrect a dead soul” after acquisition will cost the enterprises a lot of resources including technologies, resources, capital and so on. In the long run, when the economic fluctuation cycle comes, it is often difficult for such enterprises to make corresponding response, and the adaptability of which will be extremely poor. Of course, this is related to the pragmatism logic of developing countries which ignores long-term benefits.

C. The siren of capital war should be made Although Mittal didn’t “gain a complete victory” in China, in the future, when the economy 39

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is even more open and the market is much more mature, Chinese steel enterprises will definitely become potential vigorous opponents of capital soldiers such as Mittal, when there will inevitably be a tough battle. Then what will be the knack of Chinese enterprises when rising to the challenge? The key is to see the various negative factors and potential risks behind Mittal’s acquisitions, and to make the siren of capital war in advance. (a) Labor force exploitation The development road pursued by Mittal that is merging and acquiring defective state-owned steel enterprises is of huge benefit return. The steel companies acquired by Mittal in Kazakhstan, Romania, the Czech Republic, Poland and other countries are mainly with labor surplus and behindhand technologies. In these countries, as Mittal would inevitably cut down the number of employees, and the local trade union organizations regarded him as “a cruel capitalist”, Mittal combined the sales business of Polish factories with that of his factories in the Czech Republic, so as to avoid internal competition. The number of workers of the factories was cut from 14,500 down to 10,000. In the meanwhile, the workers had varied comments regarding the reform measures. “At least we can get paid on time,” said one worker from Dabrowa factory. However, he also said that, the wage level was too low compared with that of factories in Germany and France. “Here is European Union, not Asian Kazakhstan.” The original selling prices remained unchanged, Mittal cut production cost through exploitation of cheap labor, which therefore greatly improved profit, and brought him with more income. Located in European Poland, workers of the acquired enterprise got far lower wages than other workers who also worked in Europe; meanwhile, their surplus values were exploited. While the company obtained huge profit, the wages of the workers were only enough for maintaining their basic lives, not as “prosperous” as Mittal Steel. Retrospect to China, there is also such concern, and the relatively low living standard per capita and the infinite labor force supply may be basis on which Mittal keeps the labor cost down. More likely, Mittal who pays more attention to small cost and big gains may cut down cost and create unemployment by layoff, so as to realize the purpose of exploiting Chinese laborers reversely. (b) Loss of state-owned assets On the surface, it seems that Mittal acquired one after another defective state-operated steel 40

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companies in order to tide them over bad times while he picked up a terrible potato, but actually, it was a kind of low-cost plunder of state-owned assets. The capital input Mittal used to acquire the defective state-owned enterprises in Eastern Europe was far less than the original preliminary input in the construction of these enterprises by the government, and also far less than the input Mittal himself invested in establishing new factories. Mittal invested in pretty small amounts, but the values of the factories he obtained were several times of the investment, throwing a sprat to catch a herring, it was stealing state–owned assets in a disguised form to take away a large amount of state wealth which belonged to the country with a small amount of money. In addition, the state-operated steel factories were generally holding the mining rights of the domestic minerals, therefore, while acquiring the factories, Mittal also got the mining rights of these minerals, obtained cheap mineral resources, and reduced production cost, which were together helpful to realization of low-cost production, and were an exploitation of the resources of other countries as well. China was exactly in such a transition period at that time, when privatization and even foreign capitalism were main paths of shareholding reform. After the planned economy period when the steel enterprises were operated by the state, problems of steel enterprises accumulated over the years could not be resolved overnight, thus new force was badly needed to integrate the enterprises. Mittal just took use of such opportunity and Chinese enterprises’ badly need of introducing capital, under the circumstances that there was certain leak in the current evaluating mechanism and supervision of state-owned assets transfer, it brought down the share prices, or held more shares, or even adopted his idiomatic acquisition manner of “equity plus cash”, so as to exchange “bubbles” for truthful state-owned assets. Thus, state-owned assets which had been already lost through management buy-outs such as China Oriental Group flew abroad again. (c) Transfer pricing and profits shifting This is just a kind of forecast or even speculation. Mittal successfully controlled the upstream resources of two domestic enterprises and mastered the global market, which together were the necessary conditions for a transnational enterprise to transfer pricing and shift profits. Luis Coronado, a transfer pricing partner of Deloitte China, said: “As different areas or 41

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industries enjoy different tax preferential policies in China, enterprises have the chance to make tax planning in different areas in the same country, however, as transfer pricing is also involved in business transactions among domestic enterprises, more and more enterprises are focusing on research of relevant strategies and renewal of their own strategies so as to adapt to the strategy requirements of transfer pricing, which makes it possible for the enterprises to lower the cost.” Transfer pricing can lower the cost, so Mittal wouldn’t refuse it either; moreover, Mittal was controlling so huge upstream resources of the world. However, this might not only cause tax loss due to Chinese government, but also lead to loss of profit due to the enterprises. Taking the data of 2004 for an example, as indicated in the data, the self-reported deficit of foreign funded enterprises was as high as 120 billion RMB, and 60% of foreign direct invested enterprises in China were alleged to be in loss. Some scholar hit the mark with a single comment saying that they were playing tricks with “transfer pricing”. Quite a lot of foreign-funded enterprises conducted “high-price-in and low-price-out”, “low-price-in and high-price-out” or even “allocating expense subjectively” without restraint. From the characteristics of the industry, Mittal would choose to transfer pricing in barter transactions, which was the most important yet most frequently used manner of transferring pricing. The major methods were “high-price-in and low-price-out” and “low-price-in and high-price-out”. One possible mode was that Mittal imported raw materials from abroad where the costs of raw materials were relatively low, and then conducted deep processing or produces high-end steel products with extremely high additional value, and Mittal might subsequently dump the products at prices lower than the costs to overseas associated enterprises or affiliations which finally sold the products at the prices below the market prices, thus the sales volume was increased, and a process of profit transfer was completed as well.

D. Dealing with the capital torrent courageously and resolutely ing with the capital torrent (a) Joining hands in strength and actively deal dealing Although the steel groups in China have realized the damage to domestic interest from the invasion of foreign investments, and corresponding countermeasures have been taken, including joining hands in strength, there are still many dilemmas. For example, the internal

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cooperation is not united, the concrete cooperation details have not reached the essence, and the managers of all the large-scale state-owned steel companies show no respect for each other and have no enough cooperation sincerity. The concentration of industries is advantage to resisting the adverse consequences of the entry of foreign investments, and China should realize that once foreign investments invade, it will be a plunder of state-owned assets and will limit the living space for state-owned manufacturers in China, so we should actively cooperate and jointly resist the penetration of foreign capital, and protect and expand our own living space as well. Zhu Jimin, a deputy to the National People’s Congress and chairman of Capital Steel, once said that, with regard to the aggressive tide of merger and acquisition, “The enterprises and the government are all anxiously researching on the countermeasures to prevent risks and monopolies, and we are currently lack of a relevant department and a law”. “At present, if you want to tackle with China, you need neither gun nor cannon, but to control China in finance and industry” said Zhu Jimin, to deal with Chinese national enterprises, the foreign enterprises which has monopolized in the Chinese market tend to suppress them through intellectual property, or strive to take them over. ing the cooperation manner with transnational enterprises (b) Innovat Innovating Through the analysis in this chapter, we can say that the merger & acquisition method of Mittal followed the express strategy way of “globality—emphasis on country/region—assess of the potential of concrete enterprise”. In the global vision, Mittal saw the huge market in production and consumption of Chinese steel industry; meanwhile, the domestic steel enterprises were attracted by the powerful strength of Mittal. However, during the transnational merger and acquisition process which seems to be “complementing each other’s advantages”, beyond the landmark meaning of cooperation, people can’t help but wonder whether it is a “pie” or a “trap”. The capital operation such as contribution to Valin will definitely bring relatively profound and lasting influence over the extent of the opening policy adopted by Chinese steel enterprises. So far, the development pattern of domestic steel industry is relatively single, which is mainly investing in factories and increasing capacity, and there is outstanding phenomenon of diseconomies of scale. While the international top steel enterprises such as Mittal generally increase their capacities by mergers or acquisitions among enterprises. The 43

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successful merger & acquisition cases indicate that merger & acquisition has become an inevitable choice for the development of steel enterprises in the world. On the one hand, through merger & acquisition, the bargaining power of steel enterprises can be raised, thus they will stand in a more advantageous position to bargain with their upstream and downstream enterprises; on the other hand, through merger & acquisition, resources are integrated and concentrated, thereby economies of scale can be realized, production efficiency will be increased and research & development cost will be reduced by technical progress and craftsmanship improvement, thus core competitiveness will be improved fundamentally. We should say that Chinese steel enterprises should learn from Mittal, namely, we should actively face with merger & acquisition, and borrow force to make force, raise the industry concentration, construct giants of Chinese enterprise industry, rely on the Chinese platform and conspire for the global market. In addition, domestic steel enterprises should also consider more about how to organically bond “bringing in” with “going out”. Meanwhile, it is urgent for them to discuss about how to realize the upgrading and transformation of Chinese industrial structure and conduct the strategy layout of capital in the world through innovating investment mode. Furthermore, domestic steel enterprises should positively conceive effective policy support system, so as to provide excellent policy environment and support for innovation of the internal and external investment modes and promoting internationalized operation for the enterprises. ing to shape the image of a merger (c) Learn Learning When Mittal was going to acquire Arcelor, the latter almost launched a comprehensive resistance fight from European enterprises to European government. The practice of Mittal deserves domestic steel enterprises and even all enterprises thinking deeply about. After being resisted, Mittal immediately went to France himself and lobbied all walks of life in Europe, stating that after Arcelor was acquired, the employment would not be reduced, and the business would flourish as well. Through a noted public relations company in Paris, Mittal contacted with various persons of the government frequently, including the minister of finance, members of parliament and even media commentators, thus he was soon known by all the walks of life in Europe and trust was quickly set up between them. Consequently, an image of refined and courteous, rigorous entrepreneur who was full of sense of responsibility was established. In order to further eliminate suspicious, Mittal even moved the global headquarters of the group from India to Europe. 44

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Chapter Ⅲ Alcatel Alcatel’’s Battle in China After joining WTO, the capital market in China was gradually opened up, many transnational companies abandoned the original traditional manners of entering by non-holding wholly owning, non-property joint venture and permitting mode of production, but entered the Chinese market by diluting the shares held by the Chinese party through stock transfer or increasing investments after merging and acquiring joint ventures by agreements. In this context, Alcatel accelerated its steps of invasion and attempted to capture the Chinese market, thus a white war began quietly.

A. Alcatel: a tycoon of global telecom Alcatel is a well-known supplier of communication equipment in the world, headquartered in Paris, its business extended to more than 130 countries of the five continents of the world, with 120,000 employees worldwide. Alcatel devotes itself to providing integrated end-to-end vocal/data network solutions for telecom operators, enterprises and consumers worldwide, which is one of the leading suppliers of communication solutions in the world. With its long-term

advantages

in

telecommunication

network

equipment,

its

professional

technologies and experience in application and network service, Alcatel keeps devoting itself to optimizing service and increasing its revenues. Meanwhile, Alcatel is one of the most innovative companies in the world, with more than 20,000 engineers engaging in research and development work, which accounts for 22% of the total number of the employees. Alcatel has also taken the lead to establish an optical valley in France, which attracted much attention from the world. In 1995, Serge Tchuruk began to act as CEO of the company, and under his leadership, Alcatel started its hegemonic road in the telecoms industry, its business field transformed comprehensively and the company began global expansion within the territorial scope. Serge Tchuruk was as ambitious as a lion, he had quite clear purpose: to make Alcatel a comprehensive supplier in telecommunication and to win the market by complete end-to-end products. With this purpose, during the short period between 1997 and 1999, Alcatel financed as much as 10 billion US dollars through selling the electric equipment, nuclear 45

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power and other industrial businesses of the company. Consequently, Alcatel acquired without restraint with these funds and quickly completed the transformation to a pure supplier of telecommunication equipment. At the end of 2006, Alcatel merged with Lucent and became the second telecom equipment supplier second only to American Cisco in the world therefore. Alcatel was the King of the cable (especially broadband) area, while Lucent took the lead in the wireless (especially CDMA) area, thus the merger between them made the two enterprises which had their own leading businesses but were in weak positions respectively strong again. In the Chinese market, the merger also brought the two companies with huge interest. Lucent was an important supplier of CDMA of China Unicom, and Alcatel had been providing services to China telecom and China Netcom for quite a long time. After the merger, Alcatel-Lucent owned one of the largest research and development institutions and the most extensive combination of wireless, cable and service products. With the comprehensive and diversified full sets of product solutions, the company had obvious advantages in the areas which had most rapidly growing demand during the transformation of network, and remained in a leading position of areas such as IPTV, broadband access, IP Carrying Network, IMS, next generation internet and 3G.

B. Leading the Chinese market In fact, as early as the first years of 1980s, Alcatel had recognized the importance of the Chinese market and begun to think about making a profit from China, which was relatively rare among the current transnational companies. In 1984, the first joint venture of Alcatel was formally established, namely, Alcatel Lucent Shanghai Bell. Thus, Alcatel laid out its first step in the Chinese battlefield. While at that time, Alcatel’s competitors such as Nortel and Lucent were still wandering beyond the threshold of the Chinese market. In 1994, Alcatel established Alcatel China Limited, which was responsible for coordination and support of Alcatel’s business in China. In early 2000, Alcatel moved its Asia Pacific headquarters to Shanghai, and became the first international telecommunications company to set its Asia Pacific headquarters in China. At present, Alcatel has set up at least 21 joint ventures and wholly owned enterprises in China, so as to provide a wide range of telecommunication products and services, the business of them include public exchange equipment, SDH optical lines and microwave 46

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transmission system, access system, satellite system, mobile communication equipment etc. Its research and development institution in China has launched the first WAP network, GPRS network and VPN (virtual private network) and so on in complete Chinese. Alcatel has invested over 420 million US dollars and employed 5000 staffs in China. In the Chinese market, Alcatel performs impressively, remaining in a leading position. It ranks the first (accounting for more than 30% of the market share) in the exchange area, the first (accounting for more than 50% of the market share of ADSL) in the broadband access area, the first in the optical cross connection area, and again the first in the satellite area. In addition, Alcatel owns the most extensive marketing services network in China. (a) The first battle: acquisition and expansion Alcatel launched a round of fierce attack in the security market through acquisitions. At least three listed companies (Shanghai Belling, Shenzhen SDG information (SDGI), Tianxing Instrument & Meter) had connection with Alcatel or its institutions in China. According to the common appellation in Chinese security market, the Alcatel system (or Alcatel concept) in the stock market had begun to form shape. a. Shanghai Belling of the “Alcatel system” In the afternoon of October 23, 2001 and on the eve of the day on which China joined WTO, Alcatel Lucent Shanghai Bell and the foreign party Alcatel signed a share adjustment agreement. Accordingly, Alcatel would acquire 10% of the shares plus one share of Shanghai Bell and buy out all of 8.35% of the shares owned by the Belgian government. Thereafter, Alcatel would own 50% plus one share of the company, while the remaining would be attributed to the Chinese party. Meanwhile, Alcatel’s main business in China would be incorporated into Alcatel Lucent Shanghai Bell, and the company would be renamed Alcatel Shanghai Bell. So far, Alcatel would become the first international enterprise to set up a joint stock company in China in the telecommunication field. Alcatel’s entering and hosting Shanghai Bell had landmark meaning, i.e., it took the lead for foreign capital to enter into the telecommunication field, and it was the first time that a Chinese communication enterprise was held by foreign capital. In addition, Alcatel had coveted for Shanghai Bell for quite a long time, as early as in 1999, Alcatel put forward the idea of increasing investments and extending its shares in Shanghai Bell, and during the several times when the senior management of Alcatel visited China, 47

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they raised the request to Premier Zhu Rongji and other related government leaders for many times. In

1984 When

Shanghai Bell

was

established, the

shareholders

were

China

National Post and Telecommunications Industrial Corp., Belgium Bell and Cooperation and Development Fund of the Kingdom of Belgium. Later, Belgium Bell was merged by Alcatel, and Alcatel became one shareholder of Shanghai Bell, owning 31.65% of shares, the Chinese party (Huaxin Economic Development Center of Posts and Telecommunications of China) held 60% of the shares, while Cooperation and Development Fund of the Kingdom of Belgium held 8.35% of the shares. Since the establishment, Shanghai Bell had developed into a large supplier of telecommunication equipment which could exercise influence of control over the domestic communication industry, and one of the largest manufacturers of exchange system in the world, accounting for 1/3 of the shares in domestic vocal exchange equipment market. Alcatel saw the huge business opportunity in it, and made every endeavor to obtain Shanghai Bell. The negotiation about share adjustment between the two parties lasted as long as a year and a half. Obviously, the focus of the long negotiation was “who to hold the company”. At last, Alcatel purchased 10% plus one shares of Shanghai Bell, and bought out 8.35% of shares of Shanghai Bell owned by the Belgian government through another agreement. There was something fishy about it, as upon the completion of the two transactions, the shares held by Alcatel raised from the original 31.65% to 50% plus one. It was worth noting that the Chinese name for the new company was “ 上 海 贝 尔 阿 尔 卡 特 股 份 有 限 公 司 ”, but the English name for which was “Alcatel Shanghai Bell”, from such subtle change in consequence, we could get a glimpse of the thought of Alcatel. In addition, Alcatel owned 50% plus one shares, and Shanghai Bell owned 50% minus one shares. “If you add one share, it will be too much, but if you subtract one share, it will be too little”, such delicate shareholding ratio just reflected the much thought of Alcatel. Although it was only of symbolic meaning for owning two more shares, we could see that Alcatel was quite firm in holding the company. Considering about as early as in the end of 2000, when Alcatel moved its Asia Pacific headquarters from Australia to Shanghai, China, it was thus clear that Alcatel was eager to occupy the Chinese market. Although Alcatel had planned to enter into the Chinese market many years ago and was the first foreign funded enterprise to enter into the communication product manufacturing industry in China, as the investments were too scattered, the competitive power was weakened and the expected effect was not received. 48

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Another purpose for Alcatel to enter and host Shanghai Bell was to penetrate into the various fields of the communication industry of China through acquisition. From the point of view of Alcatel, over the years, Shanghai Bell had formed strong awareness and influence of the brand, set up a nationwide network of marketing services, and established the largest manufacturing platform of program-controlled exchange equipment in the world; all of these advantages were pretty attractive to Alcatel which increased its strength in attacking cities and acquiring space in the communication market in China. After acquiring Shanghai Bell, Alcatel’s manufacturing capacity in the Asia Pacific region was enhanced, and its market share was expanded, which were all advantages for Alcatel to get more profit. The merger between the two companies would bring Alcatel with an annual turnover of 2 to 3 billion US dollars in the Chinese market, so as to catch up with the levels of Nokia and Ericsson. Coincidently, the original Alcatel Lucent Shanghai Bell was the second largest holder of the listed company Shanghai Belling, so after the shareholding modifications of Shanghai Belling, the second largest shareholder of it turned to be Alcatel Shanghai Bell as well. Therefore, through acquiring Shanghai Bell, Alcatel not only became a holding shareholder of Shanghai Bell, but also indirectly held the shares of a company listed in China. Over the years, global companies cast covetous eyes on the Chinese market; Alcatel was just one of them, which sneaked on with divided forces by making use of the policy space, set up various joint ventures in China and laid out as many arrangements as possible. Through this merger, Alcatel efficiently used all of its arrangements with Shanghai Bell, earlier than other transnational companies, and realized the junction of all of its divided forces in China. For a long time, the communication market of China was divided into two groups, foreign companies represented by Alcatel, Nokia, Ericsson, Nortel, Lucent etc and Chinese companies represented by Shanghai Bell, Shenzhen Huawei. Before the acquisition, although the switchboard products of Shanghai Bell were known as No.1 in China, in mobile communication equipment and optical network equipment, Ericsson, Alcatel, Motorola, Lucent and other enterprises which entered into the Chinese market after Shanghai Bell had stronger development momentum, and in the switchboard market, the emergence of local enterprises such as Huawei and ZTE were constantly encroaching on the market share of Shanghai Bell. Bell was equipped with excellent sales teams and brands; its market position declined gradually was mainly because it fell behind in frontier communication technologies. 49

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Now, let us have a look at the situation of Alcatel. In 2001, among the three central areas of Alcatel which were America, Europe and the Asia Pacific markets, Asia Pacific accounted for less than a half of the shares. However, this was not enough for us to worry about its role of the third pillar of Alcatel’s global strategies. The charm of Asia Pacific especially China was well known. As a European company, Alcatel wished to promote its development in America market through the acquisition of Lucent. However, Alcatel failed in its attempt to acquire Lucent in the first half of 2001, which indicated that there was something insufficient in the strength of Alcatel. Alcatel rose rapidly, but was deemed to be belonged to the second group army by Motorola, Ericsson, and Lucent etc. Alcatel set up as many as 17 joint ventures in China, but the businesses of which were scattered among the various joint ventures; as to the ventures, they were of diversified scale, the powers of which were dispersed, and they acted on their own free will, but almost none joint venture was extremely outstanding. Thus, the image of Alcatel was vague in the Chinese market, and its products and marketing ability appeared to be relatively weak because of dispersion. Dealing with an organization with multiple heads also made many clients feel at a loss, and they even didn’t know who could stand for Alcatel in deed. In order to improve its competiveness in the Chinese market, it was extremely urgent for Alcatel to integrate its businesses in China. After the failure in acquiring Lucent, Alcatel attempted to acquire Shanghai Bell instead. As stated above, Shanghai Bell was in badly need of Alcatel’s first class communication technologies which it lacked most. Consequently, Alcatel played the same old trick, hoping to stand firm in China and even in Asia Pacific through acquiring Shanghai Bell. This time, Alcatel succeeded. The purpose of this acquisition was not just to change the numbers in the financial statements, but more importantly, with Shanghai Bell in hand, Alcatel would possibly become a leader of the telecommunication market in China. After the acquisition between Shanghai Bell and Alcatel (China), the amount of sales would exceed 2 billion US dollars, ahead of Motorola and Ericsson, and quite close to the first place of the current manufacturing of telecommunication equipment in China, namely, Huawei. Under the background that the European market of telecommunication equipment manufacturing stopped growing and the American market began negative growth, winning the Chinese market meant seizing the future sustained growth point. Alcatel did perform in Shanghai, but its mind was to beat its global rivals. The reason why Alcatel requested to get 50% plus one shares was that, only by holding could Alcatel consolidate its global performance in the statements and then improve its 50

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performance in the stock market. However, these were just official excuses used to deceive the public. The truth was that, the added one share was so important that it directly determined that Shanghai Bell would be included in the global system of Alcatel and develop in the management mode and business structure of Alcatel. Originally, the internal two leadership groups of Shanghai Bell represented their own interest, although the Chinese party had the last word, the conflicts of interest tangled among the management and the operation personnel; after the acquisition, such things wouldn’t happen in the new company, as the chief executive officer appointed by Alcatel would have all the decision-making power. All conflicts of interest would only be contested in board of directors and shareholders’ meeting (the number of directors of the Chinese side was equal to that of Alcatel). In other words, Alcatel Shanghai Bell would be a subsidiary of Alcatel, and would be responsible for coordinating with the group in completing its global strategy. After Shanghai Bell merged with Alcatel, Huawei, which stood in the first place in the communication manufacturing industry in China, would be greatly challenged, and the competition structure of the communication manufacturing industry would be deeply affected. Nevertherlse, because of the complexity of large-scale acquisitions, such effect did not comprehensively break out soon. However, domestic enterprises soon sensed the coming of merger & acquisition storm in broadband access products first. Alcatel stood in a leader position in ADSL broadband access systems in the world. Before the acquisition, Shanghai Bell was an agent of ADSL products, and experienced a tangled warfare with the sales of Alcatel (China). After the acquisition, this kind of products was first straightened out with the consolidation process, and Huawei tasted the power of acquisition soon. As to mobile communication, before the acquisition, the GSM products of Shanghai Bell Alcatel Mobile Communication Company took up very small market share, which was mainly because Alcatel provided insufficient support previously, and the sales network of Shanghai Bell was not taken good use of. However, all of these changed immediately after the acquisition. It was Beijing International Switching System Co., Ltd that had similar strategies with Alcatel and caused Huawei to be alert, Siemens directing the company had already done well in technology transfer; meanwhile, through cooperation with the government and domestic enterprises and by taking use of the sales network and customer relationships of the Chinese party, the company occupied large market share. Following the strategy change of Alcatel, it was possible for other transnational enterprises to create new acquisition storms. In other words, the acquisition activity of Alcatel was just a beginning. As a bellwether of domestic 51

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communication industry, Huawei was actually besieged on all sides. This acquisition broke through the base line of foreign holdings of the telecom industry, and Chinese enterprises would face up with huge impact from transnational enterprises. b. SGDI of the “Alcatel system” Alcatel’s important role in SGDI (Shenzhen Tefa Information Alcatel Optical Fiber Co., Ltd) was generally reflected in the financial statements; in just a year after the joint venture established by Alcatel and SGDI, the interim report of SGDI in 2001 indicated that Shenzhen Tefa Information Alcatel Optical Fiber Co., Ltd had brought an investment profit of 7.96 million RMB for the company. In fact, SGDI only invested 108,104,500 RMB in the project. On July 7, 2000, SGDI signed an agreement with Alcatel (China) Investment Co., Ltd (hereinafter referred to as “Alcatel”), both parties agreed to establish Shenzhen Tefa Information Alcatel Optical Fiber Co., Ltd (hereinafter referred to as the “Joint Venture”) for production and sales of optical fibers, the registered capital of the Joint Venture was 18 million US dollars, and the aggregate investment of it was 28 million US dollars. SGDI occupied 45% of shares, and Alcatel occupied 55% of shares, both contributed in cash. According to the scale designed by both parties, the annual output of optical fibers of the Joint Venture would be 1.5 million kilometers, and the Joint Venture would become one of the largest manufacturers of optical fibers in China. We could say that both parties had taken great pains: on the one hand, in order to ensure that the Joint Venture could operate with high efficiency and that the financial statements could look fine, the plants previously established by SGDI for the “optical fiber project used for communication” with the raised funds would not be used as contribution for the Joint Venture, but be leased to the joint venture at market prices. Thus, not only the stability of the investment of the Joint Venture was guaranteed, but SGDI was also brought with a stable amount of income. The interim report of SGDI in 2001 indicated that the company charged the newly-built optical fiber company 1,999,424 RMB as lease rental. Then, on January 9, 2001, SGDI issued an announcement on connected transactions, indicating that Shenzhen Tefa, the first largest shareholder of SGDI, transferred its 75% of the shares of Nova Cable Optical Fiber and Cable Communication Co., LTD to the Joint Venture. After the share transfer, the development business of SGDI in the field of optical fiber was assigned to the Joint Venture, and accordingly, the power to influence in SGDI of the largest shareholder of the Joint Venture, namely, Alcatel, was significantly

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extended. Finally, both parties cooperated in elongating the industry chain of SGDI. c. Tianxing Instrument & Meter of the “Alcatel system” On January 16, 2001, Chengdu Tianxing Meter Co., Ltd. issued an announcement, alleging that the largest shareholder of the company, namely, Chengdu Tianxing Instrument & Meter (Group) Co., LTD, proposed to transfer its 18% of state-owned institutional shares of Tianxing Instrument & Meter to Shanghai Optical Communication Company (SOCC). Tianxing Instrument & Meter Group had initialed an equity transfer agreement with SOCC on January 13, 2001, according to which 18% of state-owned institutional shares of Tianxing Instrument & Meter, namely 19,440,000 shares, would be transferred at the unit price of 2.10 RMB to SOCC. Shortly after Tianxing Instrument & Meter was listed, although Tianxing Instrument & Meter Group held more than 70% of its shares, in September 2000, Tianxing Instrument & Meter Group had already initialed an agreement to transfer 22% of state-owned institutional shares with Shenzhen Pinpai Investment Development Co., Ltd. As an investment company, obviously Shenzhen Pinpai Investment Development Co., Ltd would not be reluctant to leave the operation of industry. It was not difficult to imagine what it meant when Shenzhen Pinpai Investment Development Co., Ltd transferred its shares to SOCC. Regarding to the strength of SOCC, it was nothing difficult to restructure Tianxing Instrument & Meter. SOCC was established in June 1985, a state-owned directly subordinate to Shanghai Economic Committee, a key enterprise in the development of Shanghai optical communication industry, and an enterprise group greatly supported by Shanghai Municipality. More importantly, SOCC had set up joint ventures with multiple corporations with foreign capital. Since 1990, SOCC has started to take the lead to unite the related enterprises in Mainland China, so as to set up Shanghai Lucent Technologies Communications Equipment Co., Ltd, Lucent Technologies Shanghai Fiber Optic Co., Ltd, Alcatel Shanghai Cable Co., Ltd and Scientific Atlanta of Shanghai Co., Ltd together with American Lucent Microelectronics, French Alcatel, American Atlanta and other well-known transnational companies, and has gained the production capacity of a full set of equipment, optical fiber and cable launched and received by light/electricity and transmitted by lines, and preliminary constructed the basic frame of Shanghai communication industry. Although Alcatel was not standing in an advantage position in Shanghai optical communication, and SOCC had no plan to further hold the shares of Tianxing Instrument & Meter either, Alcatel was good at fighting protracted wars, and on account of its unexpected ways of performance, Alcatel’s imagination space remained to be a concern. 53

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(b) The second battle: risk investment in the Chinese market On April 12, 2004, Alcatel announced to officially establish “Alcatel Telecom Technology Fund” and put it into operation. This was the first fund in mainland China which provided direct investment into domestic original telecommunication technologies, and was the first time for Alcatel to put risk investment in mainland China. New Margin Ventures became a custodian of the fund. This combination of an international telecommunications tycoon and domestic elite in risk investment caught widely attention. Alcatel launching its first technology fund at this time was out of deep consideration. After China participated in WTO, the opening up of the telecommunication industry revealed tremendous opportunities. Under such circumstance, it was one way to cooperate with large companies, and another way to invest in small companies which were still under startup stage. This mode of Alcatel brought about excellent effects to the United States, Israel and other countries, the cleverness lied in that, the company could invest in research and development most effectively and earn some profits from such investment. And more pivotally, the purpose of setting investment fund in China was not on how much it could earn from IPO, but whether it could lay powerful pieces for its future layout. Let us consider in what manner Alcatel’s fund in China will quit. The possible manner would not be a traditional IPO manner; on the contrary, it wished to acquire the enterprise it invested in the future. In the United States, 70%~80% of the fund quitted through acquisition or merger, and only 20% of the funds quitted through the IPO manner. The strategic emphasis of Alcatel’s investment was mainly on the integration of equipment and services relating to 3G, IPTV, fixed network and mobile businesses. On the surface, Alcatel alleged that it preferred to quit through merger or acquisition as it had strict requirements of technologies, but in fact, the primary cause was that quitting through merger or acquisition was an advantage to the development of its own business and to the achievement of profit. (c) The third battle: rail transit In 2004, on the formal operation ceremony for Phase Ⅰof Line 1 of Wuhan rail transit, Alcatel, which provided the line with “nerve center” technology, expressed that it would enter into the rail transit market in China comprehensively, and had aimed at various urban rail transit projects including Shanghai Line 8 and Beijing Line 5 which had gone through to the bidding process after Wuhan and Guangzhou. 54

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Transnational enterprises stepped into the industry in succession, which brought the competition in domestic rail transit market to a “warring states period”. Before Alcatel entered into the rail transit market, Siemens, Alstom etc had taken the preemptive opportunities in various projects in Shanghai, Guangzhou and other cities. And the “trump card” brought by Alcatel which gaining mastery by striking only after the enemy had struck was the most advanced moving block train control system in the world, it was brand new technology for China, but had been successfully operated for nearly 20 years in more than 20 countries across the world. The biggest advantage of the system was that it could reduce the cost, shorten the train intervals to the maximum extent and realize driving without a driver. Then, how many gains could Alcatel get in rail constructions? According to the data from National Development and Reform Commission and Ministry of Housing and Urban-Rural Development of the People’s Republic of China, during the “Tenth Five-year Plan” period (between 2001 and 2005), the investment in Chinese subway construction reached 200 billion RMB, and the built length of rail transit lines was about 450 kilometers; in 2020, the length of subway lines will exceed 550 kilometers; and until 2050, the length of light rail and subway will be 2000 kilometers. Taking the train control system which transnational enterprises are mostly good at and which is most difficult for domestication for an example, if calculated by the present levels, the input for each kilometer of rail transit line is 10 million RMB, thus 20 billion RMB will be invested in 200 kilometers of rail transit lines. Projects such as train manufacturing beyond the control system are orders with even larger amounts, in the next 20 years, the annual demand for carriages from subways and urban railways in China will increase from 3500 to 17000 sections. In addition, the demand from citizen’s activities will impel the government to boost the construction of rail transit, and bring huge business opportunities for transnational enterprises. Of the 12.5 billion Euros of global annual turnover of Alcatel, the rapidly growing rail transit business has already accounted for as much as 8% to 9% and such proportion will also be reached in the Chinese market as well in the future. (d) The fourth battle: expelling Chinese capital We mentioned above that on May 28, 2002, the old brand domestic telecom enterprise 55

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Shanghai Bell merged with Alcatel, a “big Mac” in French industry, and established the first foreign funded joint-stock company in domestic communication industry, which was named Alcatel Shanghai bell (ASB), with Alcatel holding 50% plus one shares. At that time, the media praised the merger with flattering words in succession, such as “win-win partnership forging an aircraft carrier”, however, just a few months later, ASB announced to downsize on the pretext of a “voluntary resignation plan”, which arose a wave of layoff. Among the much information regarding the layoff, there was one fact ignored by the media. The profits of Shanghai Bell and subsequent ASB kept sliding down, and suffered one defeat after another. From January to September 2002, the profit of ASB dropped by 65.3% on a yearly basis, among which the operating profit dropped by 86.3%, the sales revenues dropped by 26.3%, and the output value also dropped significantly. In the establishment celebration of ASB on May 28, the chairman Yuan Xin once announced that, SAB would recruit more research and development personnel on the current base of 5000, and committed together with the president of Alcatel Serge Tchuruk that ASB would not downsize. However, the commitment drifted down with the fallen leaves in autumn. After the president of ASB Yang Anzhuo issued the Letter to All the Staffs, the downsizing plan was launched officially. The company mainly downsized by persuading the targeted staffs to quit and giving them economic compensation, and at that time about 1200 targeted staffs submitted their resignations. Let us work out the accounts like this: if a bachelor graduate worked in the original Shanghai Bell for three years, he/she would get a compensation of about 100 000 RMB. Most staffs resigned from the company got exactly this amount of compensation. Staffs with better education background, higher position and longer work seniority would get far more than that amount. Thus ASB lost almost 100 million RMB in compensation this time. It was Alcatel which put forward to downsize, as the Chinese party endeavored to the scheme, the layoff scheme was a product of compromise, so the amount of the compensation was relatively high. However, why didn’t Alcatel keep its faith but proposed to downsize after just a few months? The integration after the merger between Shanghai Bell and Alcatel was extremely difficult, in which the biggest difficulty lied in the integration of cultures. All mergers and acquisitions would face with the problem of culture, as for Alcatel, it should adapt to rather than reform the culture. 56

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Obviously, the various problems caused by merger were reasons for the slide-down of the company’s performance. In equity arrangement, Alcatel held the company by 50% plus one shares, which meant that Alcatel was the dominant party and stood in a strong position, thus the pain was assumed by Alcatel to a large extent. Alcatel chose Shanghai Bell because the latter was relatively strong in production capacity and had a relatively mature sales network. It was extremely important for Alcatel to win a battle successfully. In its headquarters in France, Alcatel laid off 29 000 staffs of its global subsidiaries within 18 months. The number of orders was sharply reduced, the performance slid down, the inventory was increased…the evil consequences of the network bubble burst began to appear. Various signs indicated that, Alcatel led a painful life which was less than satisfactory. But which was more painful, Alcatel, or Shanghai Bell? Same as many other joint ventures in this field, the fatal weakness of the original Shanghai Bell was lack of core technology. It was like a man with sound arms and legs but underdeveloped brain. Once it was stuck in its neck by the technology providers, death was no strange thing for it. Then, what the research and development ability of ASB will be like in the future? Several hundred downsized staffs are from the research and development department. This is apparently an obvious signal indicating that ASB in China is probably just a processing plant in the overall layout of Alcatel. So far, the intentions of both parties of the joint venture are gradually clear. Alcatel expects to obtain the government background of quasi-state-owned enterprise, the monopoly resources supported by the Ministry of Information Industry, the relatively strong manufacture ability and the established sales network of Shanghai Bell. Once obtained, it appears to be well-reasoned for Alcatel to lay off the surplus staffs in the research and development department. Serge Tchuruk once committed to invest 15% of Alcatel’s research and development expenses in the global research and development center of ASB in the next three years, but in front of the fact that several hundred research and development staffs quitted, such commitment faded away with fallen leaves like his commitment not to downsize. Then, what is the intention of Shanghai Bell? In the current background of economic 57

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globalization, what is the success rate for Chinese enterprises to save themselves, and how much will the development space and room be? The transnational groups have become a board of chess, and it is those transnational tycoons that are playing the chess, the severe situation indicates that those enterprises with behindhand technology management can only be chess pieces that are to be dispatched, but if they don’t want to be chess pieces, there will be no chance of living. Before May 28, 2002, Shanghai Bell was already facing with a severe choice: either to die or to become a ring of Alcatel’s overall value chain, namely, to serve as a production plant for the global layout of Alcatel. If we say the current pain of Alcatel is temporary and active, then the pain of Shanghai Bell can be said to last long and be helpless. For twenty years, China has been exchanging market for technologies, and many enterprises pursue only immediate interest, they merely introduce investment, when their research and development abilities kept lagging behind. This way of entering into the global layout of transnational companies is just like “selling its own body”, which is a compulsory choice. Before the merger, due to its weakness in research and development, Shanghai Bell had gradually lost its core competitiveness. However, for a long time, the effectiveness of this enterprise was not poor, combined with the resources provided by the Ministry of Posts and Telecommunications and the Ministry of Information Industry previously, it led a pretty good life, but why Shanghai Bell was unable to save itself finally, being unable to break through the technology bottleneck and fell into the helpless destiny of compulsory choice? It is worth thinking deeply about. Shanghai Bell is just a miniature, many other joint ventures of the information and technology industry and other industries have met with the same problems, and the pain of Bell is also a miniature of the pains suffered by Chinese enterprises in the WTO era. This kind of keenly felt pain will possibly last for ten years or even twenty years, but which is meaningful if the enterprises could promote themselves from production centers to management centers or R&D centers. Whether they can promote and save themselves depends on how will the Chinese enterprises and entrepreneurs act. (e) The fifth battle: culture diplomacy From the word consequence of the English name “Alcatel Shanghai Bell” only, we can see the strategic feature and flexibility of Alcatel when dealing with the communication between the Eastern and Western cultures. As the largest provider of communication network in the world, while paving information highways for 130 countries worldwide and constantly 58

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improving the interpersonal communication manners and abilities, Alcatel also took the lead to support the exchange and development between local culture and international culture especially the French culture, so as to shorten the interpersonal soul distance. It is especially the case in China. As disclosed by the public relations department of Alcatel China, Alcatel supported various culture exchange activities between China and France. In 2002 and 2003, Alcatel sponsored the “Pingyao International Photography Festival” twice, and set up “Alcatel Best Chinese Photography Book Award” for Chinese photographers. The “Yesterday, Today and Tomorrow of Shanghai” photography exhibit held by the French master of photography in Paris from December 10, 2003 to March 7, 2004 and the “Pingyao in Paris” photography exhibit held in Paris from February 6 to March 28 were both greatly supported by Alcatel. In addition, Alcatel once sponsored a mayor meeting between China and France, the theme of which was “Urban Expansion and Sustainable Development”. However, was Alcatel really so kind? For Alcatel, it was not just sponsorship and for cultural exchange, but more importantly, it brought excellent advertising effect and established the image of the brand. Facing with the huge market in Chinese communication industry, “I feel very shocked at the vigor of Chinese communication market”, said the new president of ASB Gerard Dega on a conference with Beijing media on March 4, 2007, when he had only taking his office for two months, “Our goal in the first year is to be No.1 in China and No.1 in Alcatel group. In other words, ASB will become the best communications enterprise in China, and the best Chinese flagship enterprise in Alcatel group. We want to be the champion in research and development, manufacture, export and other aspects. And I believe we will soon see signs of success. ” However, there was hidden intention to kill behind such altisonant words. Although Dega was complacent ready to do the above-mentioned things proudly, the pressure from yearly target and the various strong rivals home and abroad didn’t let him feel relaxed at all. Obviously, the continuous culture tricks were part of the “stick and carrot” strategy of Alcatel. “There are indeed many similar features between China and France, for example, they both have long histories and abundant cultural heritage, which provide convenience for the exchange and communication between two countries and among enterprises from these two countries.” Regarding the statement that “France is Western China, while China is Eastern France”, Dominique de Boisseson saw more cultural values behind the cooperation between 59

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enterprises. Then, it is not difficult to understand why Alcatel was so keen to the culture exchange between China and France. Because it can be said to be the most brilliant means of “enterprise culture diplomacy”.

C. Reviewing China again The precipitate global financial crisis brought dramatic changes to the procurement strategies and evolution strategies of global telecommunication providers. Under such background, it seemed much more suitable for domestic enterprises to develop in such special period. Under the new environment of financial crisis, the emergence of 3G and so oon, Alcatel Lucent had to review the Chinese market again. (a) Unstable Chinese market The Chinese market was extremely boisterous in 2009, when three providers began to build 3G network, and the huge potential contained in the Chinese market was further shown. Even Tibet Telecommunication which located on Qinghai Tibet Plateau also began to deploy 3G network in the corresponding period, expand and update CDMA networks for 74 counties of 7 areas in Tibet in the same term, and newly built more than 1000 base stations; meanwhile, Tibet Mobile and Tibet Unicom deployed 3G networks in major cities. From the example of Tibet, we can easily see that the scale of 3G market in China is way larger than expected by the market analysts. In the same period, two Chinese enterprises Huawei and ZTE continued to boost in the global market. The actual operation revenues of Huawei reached 18.3 billion US dollars in 2008, while the sales revenues of ZTE in the first quarter of 2009 raised by 35% on a yearly basis. The Chinese enterprises grew rapidly relying on the markets, talents, productions and operation ideas in China. China engine (b) Boost “China engine” The new changes in the Chinese market compelled the global communication equipment manufacturers to review China again. After the replacement of CEO, the various adjustments in strategy of Alcatel had connection with China. To pay attention to the Chinese market, to pay attention to Chinese talents, and to pay attention to Chinese rivals—these were the most frequent statement of Ben Verwaayen during his two trips to China. Later, he straightly held global board meetings in China, the purposes of who was to let all the directors see the 60

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booming market in China and listen to the voice from China personally. In the past five to six years, global communication equipment manufacturers raised several rounds of acquisitions, among which Alcatel Lucent was a typical one. During the integration processes after mergers and acquisitions, Alcatel Lucent bore great pressure. In front of those enterprises which were not integrated but of powerful competitiveness, the territories of Alcatel Lucent were eroded continuously. Alcatel Lucent knew clearly of its own advantages and disadvantages. At present, the enterprise is devoting itself to building a kind of single, blended and highly yielded “application engine type” of network, which will help the clients to provide abundant and smooth interactive experience acquired by their end users, and thus bring more economic benefits for the clients. It is predictable that this will impel Alcatel Lucent to win in the Web 2.0 era and in the future Web 3.0 era. In 2009, Shanghai Bell and China Mobile and China Telecom signed a service cooperation frame agreement which was worth up to 1.7 billion US dollars. Alcatel Lucent should feel lucky for the strategy of acquiring Belgium Bell in that very year. As one of the three research and development bases and an important production base of Alcatel Lucent, Shanghai Bell has taken on a third of the global production and manufacturing tasks, played an active role in the Asia Pacific region as a junction of regional procurement and customer support, and provided advanced services. With Shanghai Bell as a carrier, Alcatel Lucent has started to actively plan the transformation of strategies in China.

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Chapter Ⅳ Danone: An Invader with Capital The value of its products are not enjoying popular support as those of its rivals such as Nestle and Coca-Cola, it is not as domineering as P&G which considers “it has to be me, and all good things should be in my collection bag”, it is sitting tight and exploring. If there had been no dispute with Wahaha, its merger & acquisition strategies may not have aroused so wide attention. It is Danone.

A. Danone: the boss behind the scene Danone came to China in early 1990s, since then it had been very closely associated with almost all the best companies in Chinese dairy drinks industry. In 2006, Mengniu and Huiyuan Juice were added into the family of Danone. No other transnational company can hide so deeply as Danone without preventing itself from becoming one of the most profitable transnational companies in China. Since 2005, China has become the third largest country of sale for Danone after France, Spain and the Canary Islands, and Danone has realized the goal of “causing the business in the Chinese market to reach 10% of global business”. In the original plan of Danone, in 2010, the ratio would reach 20%. And this goal seems to have been realized in advance. Lov red (a) “Lov Lovee and hat hatred red” of Danone To understand a transnational company, we must refer to its overall entirety. Now, let’s stretch the vision and unveil the veil of Danone Group. Headquartered in Paris of France, Danone Group is a transnational food company with extremely diversified businesses. Danone started by merger, the predecessor of which was founded on February 2, 1899, and turned to be BSN after merging with a French glass manufacturer (of plate glass and containers) in 1966. Since 1970, BSN expanded to the food industry though merging and acquiring its main clients, and gradually became a supreme manufacturer of beer, bottled water and glass in France. After the merger with a manufacturer of dairy and noodles in 1973, BSN realized an annual sales of 1.4 billion Euros 62

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(among which food and beverage accounted for 52%). Between 1970s and 1980s, BSN sold its glass manufacturing business and developed in food and beverage industry in Western Europe with all its strength, it realized sales revenues of 7.4 billion Euros and became the third largest food group in Europe. In 1990s, BSN began to expand its market outside Western Europe (the principal ways were merger and acquisition of Triumph Beer and Evian Mineral Water etc), and was renamed Danone Group in 1994. It is thus clear that it always has an origin of merger and acquisition strategies. At present, the businesses of Danone spread all over six continents, the products of it are sold to more than 100 countries, and it stands in global leading positions in almost all of its businesses: no matter in French, Italy or Spain, Danone Group is the largest food group, and also the third largest food group in current Europe; meanwhile, it ranks in top six in similar industries of the world. The products belonging to or related to the group have been world famous for quite a long time: Danone is the largest fresh dairy brand in the world; LU is the world’s second largest biscuit and grain fast food brand; Evian and Volvic have taken up two seats of the most famous four brands of bottled water. The above four brands have realized 50% of business turnover for Danone Group. However, Danone’s goal is far from these. In order to step out of Europe where the economic development is relatively slow, in 1996, the board of directors of Danone worked out the strategic decision of globalization, and focused onto three main businesses (yogurt, mineral water and biscuits). By 2005, Danone’s businesses structure was focused on three main businesses which were biscuits, yogurt and beverage. The general proportions were as follows: yogurt accounted for 55%, beverage accounted for nearly 25%, and biscuits accounted for about 20%. Looking at the history of Danone seriously, we can say, merger and acquisition strategies were the core operation means based on which Danone was able to develop. In China, the purpose of Danone to merge and acquire was not only obtaining return on investment, but also forming synergistic effect with Danone by the management and control of the merged and acquired enterprises, and servicing on the whole industry strategies of Danone. Such strategies were laying the national brands as groundwork and then pushing the independent brands to the front. The merger and acquisition strategies themselves were without rebuke, provided that the 63

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merger and acquisition should be in a win-win mode, namely, they should increase the overall effect of the acquiring enterprise and the target enterprise, and distributes the extraneous income brought by merger & acquisition in a proportion acceptable for both parties. However, Danone’s strategies in China brought serious blow to many national enterprises in China, which caused them lose their abilities of technology research and development and operation management. The merger & acquisition brought no development opportunity to Chinese enterprises, but was more like a kind of “sheep shearing”. (b) Charm of operation In the transition from a professional factory of glass to a producer of food and beverage, merger & acquisition is the secret and shortcut of success for Danone. No need for reticence, the merger & acquisition means relying on capital operation is also the optimal path to realize global layout and worldwide expansion. Then, what kind of skills does Danone follow to guide its merger & acquisition and global expansion specifically? In order to expand rapidly in the global dairy products, biscuits and bottled water market, Danone has its own principles in merger & acquisition. Firstly, it stretches merger & acquisition centering on its major businesses, at present, Danone is gradually stripping off its non-core businesses, so as to strengthen on fresh milk dairy products, bottled water and beverage and biscuits businesses with its concentrated energy and advantages; in recent years, Danone has successively sold more than ten of its subsidiaries. Secondly, in respect of merger & acquisition, Danone emphasizes on the scale and benefit of the enterprise to be acquired. Danone thinks a lot of “best” instead of “better”, even if the enterprise to be acquired is not No.1 at present, it should have the potential to become No.1. Thirdly, Danone pays close attention to the finance condition, strategies and enterprise culture of the enterprise to be acquired, especially the corporate culture. For the acquisition target, Danone lays emphasis on whether the culture may be organically integrated to the team culture of Danone so as to form a win-win situation. In addition, Danone also pursuits high brand permeability. Danone is well aware that different regions have their own unique food culture and habits, so it is necessary to reserve the existing beverage and food brands, and then weed through the old to bring forth the new through brand innovation and penetration, and finally realize coverage of new products. After the overall expansion, it is a challenge after the merger & acquisition activities to 64

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effectively manage the subsidiaries, regarding which Danone has its own attainment. Taking a comprehensive view of Danone’s choice in subsidiary management modes, it is not difficult to find that “refocusing” is an important means for effective management of diversified enterprises. Danone emphasizes on the effective management and control over core businesses by headquarters of the group, and adopts relatively loose management and control modes to the non-core businesses. For example, for core businesses, Danone tends to adopt the management and control modes under which Danone will participate in business operation management directly, namely, the headquarters will formulate strategic plans, examine and approve business plans and budgets, determine the appointments and dismissals of senior management of the business units and the remuneration appraisal system, examine and approve all the investment projects and participate in the management of major projects. For businesses with relatively mature management, Danone tends to manage and control mainly by strategic regulation, and will not participate in business operation management directly; for non-core businesses, Danone tends to manage mainly by financial control, and will not participate in business operation management, thus the business units will be able to formulate and realize each strategic planning and operation plan at their own discretions. brands talent (c) A “brands talent”” The success of Danone can never be separated from molding of brand; behind the forging of the world-famous brand, there are excellent brand strategies of Danone. We can say that Danone is a thorough “brands talent”. It is a distinct characteristic of Danone’s brand strategies to use different names for different types of products. For example, the main brand of its bottled water is Evian, and the main brand of its yogurt is Danone. Secondly, different brands are used in different countries and regions. In the bottled water, dairy products and biscuits markets of all the continents, although there seem to be a variety of main brands, many of them belong to Danone in essence, such as Wahaha and Robust in China. It is true that using uniform brands is to the benefit of resource integration, but which tends to be lack of individuality, and lose unique sense of identity and image, especially when there is big difference in nature between two kinds of products, uniform bands will lead to cognition confusion among consumers. Thirdly, Danone reasonably balances the primary and secondary relationship between the 65

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Danone brand and the brands of its subsidiaries, and is good at publicity. Danone takes use of the advantages of its brand system in different regions and sections, forms regional brand integration and complementation specific to different consumer groups and demands, and implements global expansion. Danone is familiar with the advertising discipline and brand cultivation regularity, and its distinctive brand individuality has enjoyed popular support.

B. The expansion road of Danone —detailed explanation of the (a) The first battle: falling out and becoming enemies enemies— dispute disputess between Danone and Wahaha In 1996, Wahaha, French Danone and Hong Kong Peregrine Investment jointly established a joint venture, in which Wahaha held 49% of the shares, and Jinjia Investment Company Ltd which was established by Danone and Peregrine together held 51% of shares. In the same year, Danone signed a trademark transfer contract with Jinjia. In Article 1 of the contract, Wahaha Group agreed to transfer the trademark which was worth 100 million RMB to the joint venture, of which amount, 50 million RMB was considered as a contribution to the joint venture, and the remaining 50 million RMB should be paid to Wahaha by the joint venture for the part of the trademark. It was stipulated in the original contract that “the joint venture may not transfer any trademark or any right, ownership or interest thereof to any third party, and may not allow any third party to utilize the trademark or own any right, ownership or interest thereof.” At that time, Zong Qinghou signed the joint venture agreement stating that the joint venture would be held by Danone and the trademark would be transferred, as he failed to make Wahaha listed, thus Wahaha was confronted with difficulty, when the funds offered by Danone really saved its life and helped to complete the transformation from a school-run factory to Zong’s own business. Zong Qinghou himself also got enough money to purchase part of the shares held by the government, and realized MBO in a curve-shape road by seizing the restructuring opportunity. In 1999, both parties supplemented a trademark transfer contract, one article of which seems to be controversial nowadays: “The trademark may not be used for any other purpose unless approved by the board of directors of the joint venture.” In 2005, both parties signed the first modification agreement of the Trademark Transfer

Contract. This agreement stipulated that under certain premises and conditions, non-JVs of Wahaha could obtain trademark licensing authorized by the joint venture. With respect to 66

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such non-JVs of Wahaha, there were two corresponding provisions: “Wahaha companies which have signed OEM agreements with the joint venture, or companies which belong to industries not in competition with the joint venture.” It means that such companies would obtain the legal position temporarily, but the range of application of Wahaha trademarks was enlarged as well, and the problem of ownership was concealed again. This is exactly a focus of disputes subsequently, but why did Danone sign such an agreement which seemed to be in conflict with its own interests? It seems that Danone had been collecting chips for future forceful mergers and acquisitions from the beginning. After Zong Qinghou gradually saw the real intention of Danone clearly, he began to launch continuous counterattacks. In addition to the joint venture, he started to expand without limitation with the non-JVs of Wahaha and established almost 40 non-JVs. Meanwhile, the cooperation objects of non-JVs changed gradually; through reformation, the non-JVs controlled by the Zong family gradually took the place of the joint venture funded by Wahaha Group Co., Ltd; and as of early 2006, and the total profits of such non-JV subsidiaries reached 1.04 billion RMB. When these non-JVs were set up, Danone didn’t complain strongly, but when the subsidiaries gradually began to make considerable profits, Danone started to conduct forceful mergers and acquisitions by using the trademark as a threat, offering to acquire 51% of the shares of almost 40 non-JVs of Wahaha at the price of 4 billion RMB. Thus we can say: the success or failure of the affair is all due to the trademark. Another reason why Danone demanded merge and acquisition in entirety was that, Zong Qinghou designated the non-JVs to manufacture products with high profits, but let the joint venture to manufacture products with lower profits, while Zong Qinghou had the most profits owned by him. However, in fact, Wahaha designated the sales company funded by both parties to sell products which were not manufactured by the joint venture, and brought a huge sum of profits to Danone. Regarding the sales amount, the joint venture funded by Danone and Wahaha obtained a sales volume of 1.2 billion Euros in 2006, accounting for 7% of the annual sales volume of Danone Group, and Danone gained a total sales revenues of 1.4 billion Euros in China; regarding profit, Danone invested 170 billion US dollars in more than ten years with Wahaha, but received a total dividends of 380 million US dollars, far more than the original investment. Therefore, compared with the other Chinese enterprises acquired by Danone, the joint venture established by Danone with Wahaha was definitely outstanding.

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It is worth mentioning that, during the cooperation between Wahaha and Danone, Wahaha got no core technology from Danone. Instead, Danone always interferes with the investment plans of Wahaha from Danone’s position. For example, in the middle and late 1990s, in order to expand scale of investment and production, the decision makers once wished to participate in the China’s Western Development Program, providing partner assistance to old revolutionary areas and poverty-stricken places, the Three Gorges Reservoir Area Construction and other projects. Being a joint venture party, Danone was unwilling to invest in those acitivities, and Wahaha could not invest by itself alone. Soon after that, Danone acquired the biggest competitor of Wahaha at that time, which was Robust. So the development of Wahaha was limited again indeed. Obviously, the purpose of Danone was not to expand the joint venture but merely embezzle profits and extracting cash from the Chinese market. With respect to the 4 billion RMB purchase price, as the total assets of non-JVs was 5.6 billion RMB, with annual revenues of 1.04 billion RMB, acquiring at 4 billion RMB was obviously an exampke of capital plunder. So in general, the so-called investment of Danone was actually equivalent to borrowing a hen to lay eggs. When Wahaha gained economic benefits, Danone came up with all sorts of reasons to devour those benefits, which was a typical showcase of capital invasion. Ironically, in July 2005, it was reported by major media in France that, Pepsi planned to spend 25 to 30 billion Euros to acquire French Danone Group. Subsequently, Jean Louis Borloo, Minister of Employment and Social Services of France, responded immediately that the government would try its best to stop the acquisition. He emphasized that Danone was no longer merely the best representative of French industry, but also the key to ensure the balance of French agricultural production, the carrier on which many French small and medium size enterprises were able to survive, and Danone occupied a decisive position in terms of social employment in France. In addition, Danone played an important role in the daily life and human health of French. Therefore, if Pepsi really attempted to acquire Danone, the French government would never merely sit there watching. The importance of Wahaha to China may be no less than that of Danone to France. (b) The second battle: new favorite and old love This is a story about accepting or rejecting. Danone showed a bright attitude, without being in a dilemma, but rather disappointing. 68

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In October 2007, Danone transferred 20.01% of the shares of Bright Dairy & Food at the unit price of 4.58 RMB, and took out 330 million RMB as the “consideration of market, channels and other related compensation expenses” for Bright Dairy & Food, together with 80 million RMB of compensation cost paid in April when Danone took back the sub-brand Bio mandated by Bright Dairy & Food, Danone paid 410 million RMB to Bright Dairy & Food in all. By convention, under the circumstance that Bright Dairy & Food had fully completed the reform of non-tradable shares, Danone could sell the shares it held at the unit price between 14 and 15 RMB to the public, without the need to compensate Bright Dairy & Food. So there was something hidden. In the middle ten days of June, 2007, Li Su from H&J Vanguard Research and Consulting Co., Ltd sued Danone in the name of a minority shareholder after purchasing 100 shares of Bright Dairy & Food, stating that Danone occupied a director seat in each brand manufacturer which had competitive relationship with each other, seriously violating the industry principle of horizontal competition between listed companies, and infringing the interests of the shareholders of all the cooperation parties. In addition, he proposed a letter to Shanghai City Commission for Discipline Inspection, disclosing that Danone held more shares of Bright Dairy & Food at the price about 30% lower than the market price based on the reason that Bright Dairy & Food illegally used the “Danone” trademark and violated the agreement signed several years ago, it was actually an erosion of state-owned assets specifically performed by Lin Baoheng, the former director of State-owned Assets Supervision and Administration Commission, by ganging up with Chen Liangyu. This letter was subsequently submitted to Bright Dairy & Food, which added chips for it when negotiating with Danone about compensation. However, what’s the real reason why Danone parted with Bright Dairy & Food and turned to invest in Mengniu? Let’s start from the cooperation between Danone and Bright Dairy & Food. In 1987, Danone Group tapped into the Chinese market and established Guangzhou Danone Yoghurt Company Limited. However, the company sustained losses for successive years, and even made Danone want to leave. Then Danone found a breakthrough point in Bright Dairy & Food. Before 2000, Bright 69

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Dairy & Food had been definitely staying in the first place of the industry, the sales volume of its dairy products had always been kept among the best of candidates, Bright Dairy & Food had been hoping to seek for foreign cooperation so as to develop the yogurt industry which was high value-added, as strict technical equipment is needed for yogurt production, but the domestic yogurt technology was not mature yet, we can say that it represented the general trend for Bright Dairy & Food to cooperate with Danone which was an international tycoon in the food industry. Therefore, in 1992, Danone and Bright Dairy & Food invested 3.9 million US dollars to establish a joint venture with an equity structure of half to half, thus the first cooperation between Bright Dairy & Food and Danone began. In 1995, both parties cooperated again and invested 9 million US dollars to establish a joint venture for production of Danone yogurt with an equity structure of 82% to 18%. Danone operated the two joint ventures in Shanghai by itself, but as there was limited demand for yogurt in China at that time, these two joint ventures sustained losses for successive years ever since their establishment. In October 2000, Bright Dairy& Food was reformed to a joint stock company. In 2001, on the condition that Bright Dairy & Food acquired three dairy product enterprises of Danone in China (including Guangzhou Yogurt and two joint ventures established with Bright Dairy & Food), Danone finally became a shareholder of Bright Dairy & Food, holding 5% of the shares. After a series of additional share holdings, in October 2005, Danone acquired 3.85% of Bright Dairy & Food shares held by Shanghai State-owned Assets Investment & Business Co., Ltd and 3.85% of Bright Dairy & Food shares held by Dazhong Transportation (Group) Co., Ltd, and the shareholding ratio rose to 11.55% as a result therefrom. In early 2006, when Bright Dairy & Food conducted share reform, Danone purchased 8.46% of Bright Dairy & Food held by Bright Foods (Group) Co., Ltd and Shanghai Industrial Holdings Limited at a low unit price of 4.06 RMB, thus the shareholding ratio of Danone rose to 20.01%, and Danone became the third largest shareholder of Bright Dairy & Food. This acquisition triggered quite a lot of controversy, the internal reason of which could be traced back to 2000. At the end of 2000, Danone signed an agreement with Bright Dairy & Food, according to which Bright Dairy & Food would get 12 years of right to use part of Danone’s trademarks and outer packings with symbolic 1 RMB, and successively take over Shanghai Danone and Guangzhou Danone, with all the yogurt business of Danone in China included. However, in the additional provisions of the agreement, there was a provision stating that Bright Dairy & 70

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Food might only use the trademark in two kinds of yogurt. Subsequently, Bright Dairy & Food used Danone trademark in other types of products in violation of the agreement without authorization, to which Danone raised no objection all the time, which gave Bright Dairy & Food courage to conduct subsequent violation. However, in April 2006, Danone captured the deadwood on Bright Dairy & Food as the latter “violated the trademark licensing agreement”, and forced Bright Dairy & Food to compromise by lawsuit, at last, Danone realized its goal to hold more shares of Bright Dairy & Food during the share reform period, and purchased part of the non-tradable shares of Bright Dairy & Food at a low unit price of 4.06 RMB, thus the shareholding ratio of Danone rose to 20.1% and Danone became the third largest shareholder of Bright Dairy & Food. After acquiring Shanghai Danone, Bright Dairy & Food obtained sales revenues of 130 million RMB in the first year, turning losses into gains. And after acquiring Guangzhou Danone, Bright Dairy & Food obtained sales revenues of 142 million RMB in the first year, rising more than 30% on a yearly basis, and kept an increase rate of more than 10% in the subsequent years. In April 2005, after Danone resigned its sub-brand “Bio” to Bright Dairy & Food, the sales revenues in 2006 reached about 200 million RMB, increasing by about 700% on a yearly basis. From 2002 to 2006, the Danone branded products operated by Bright Dairy & Food under authorization of Danone brought about 1.8 billion RMB of sales revenues, and especially more than 600 million RMB in 2006; since Danone cooperated with Bright Dairy & Food, the brand influence of Danone also increases significantly, in 2006, the market share of Danone in East China was about 15%, and about 40% in South China. In addition, regarding 208,482,700 shares of Bright Dairy & Food held by Danone, the original cost of them was over 700 million RMB, over 3 RMB for each share, but the selling price this time was 4.58 RMB. Meanwhile, from 2000 to 2005, Danone received a total amount of cash dividends worth 40 million RMB from Bright Dairy & Food. Therefore, anyhow, the cooperation between Danone and Bright Dairy & Food was successful from the angle of profit. Danone had three main businesses in China, which were beverage, cookies and milk, and Danone wanted to be the “dominant No.1” in all these three industries, but the milk business had always been its weak part. It is one of Danone’s goals to realize dominant position in the milk industry through holding the shares of Bright Dairy & Food, but the original intention for the restructuring of Bright Group was to integrate the relevant resources and form scale operation, so as to resist the impact from foreign capital and protect the superior assets from flowing out. 71

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The slogan of new Bright Group, the parent company of Bright Dairy & Food, was to build the largest group in the food industry, thus it would not reconcile to let the right of control fall into the hand of Danone, and it could be said that the brand of state-owned enterprise did not vanish because of the restructuring in 2006, all of these frustrated Danone’s ambitions of holding enough shares to control the company. From the leading group of Bright Dairy & Food, Wang Jiafen, the core leader of the management layer before the restructuring, was always pro-Danone, but when Wang Jiafen left the management layer of Bright Dairy & Food because of the policy that the chairman and the general manager could not be the same person, the last card of Danone in attempt to acquire Bright Dairy & Food also ended in failure. Considering the set pattern of Danone in acquisition of Chinese enterprises, it was Danone’s ultimate goal to possess the right to control, in other words, gradually acquiring the shares of Chinese enterprises to realize the goal of control, so as to push its brand to the front. The strategic failure in Bright Dairy & Food made Danone want to leave, and finally step onto the road to cooperate with the major competitor of Bright Dairy & Food, which was Mengniu. In December 2006, Danone and Mengniu set up a joint venture devoting to research and development and production of yogurt, of which Danone held 49% of shares. It was reported that Danone and Mengniu had reached an agreement before the establishment of the joint venture, which indicated that Danone must quit from Bright Dairy & Food. Although the amount of sales of Bright Dairy & Food was far less than that of Mengniu, its dairy production technology was slightly better than that of Mengniu. The entry of Danone undoubtedly brought a turning point to the technology of Mengniu, but only one day after Danone formally took back “Bio” and passed it to Mengniu in March 2007, Bright Dairy & Food released a type of high-end yogurt in high profile which was developed by the group independently, the product was rather similar to “Bio” no matter in outer packing, orientation, or its “health care function of intestinal canal”, so Bright Dairy & Food had already grasped the core of Danone’s yogurt technology. Besides, by taking use of the various supermarkets, convenience stores, exclusive shops and other terminals controlled by great Bright, Bright Dairy & Food tried to postpone and prevent the “Bio” yogurt which had been produced by Mengniu from appearing in Shanghai market again, and to reduce the terminal distribution of the products, so as to promote “Chang You” in high profile. So, it would be rather difficult for “Bio” of Danone to maintain a growth rate of 70%.

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In addition, with the exposure of Wahaha event, Danone’s ambition to hold the company was exposed to the media, it became impossible for Danone to control domestic enterprises by capital operation, and during the cooperation, Niu Gensheng repeatedly stated that Mengniu would maintain its equity advantage in cooperation with capital funded enterprises, so that the national dairy enterprise could grow rapidly without losing its dominant right. Obviously, in this cooperation, Danone accepted the rules of game set by Mengniu. In nature, the capital war between Danone and Bright Dairy & Food ended by the victory of the latter, of all the products of Danone sold in China, it were only brand and product formulas that were output, but other things from production, transportation to specific sales were directly operated by Bright Dairy & Food, if Danone had actually controlled Bright Dairy & Food, there might have been a second Robust. It was hard for us to set a final conclusion to the cooperation between Danone and Mengniu at present, but it seemed even more difficult for Danone to dominate and control the powerful Mengniu. It was unlikely for Danone to gain the right to control through illegal or speculative ways. (c) The third battle: in the pages of history--Robust Recalling the time passed swiftly as the running of water in Robust, it was full of bitterness, and made people indulge in a train of thoughts. Robust was eminent at a time, but at present, there are scars of wounds strunging together like beads, and Robust has completely changed. There was even someone described the current Robust to be “threatened by growing crisis, confused and helpless”. In March 2000, Danone Group officially signed an agreement with Chinese Robust Group, indicating that Danone Group would purchase 60% of the shares of Robust Group; it would contribute 23.92 million US dollars to establish Robust (Guangdong) Food & Beverage Co., Ltd together with Robust. The intention of Danone was to build a sales platform which belonged to Danone through the channels of Robust, which platform would sell not only products of Robust, but also other products of Danone, including Yili, C’estbon and Maling Aquarius. As to Robust, as recorded in the “general information” upon the establishment of Robust (Guangdong) Food & Beverage Co., Ltd, the yogurt and dairy market was still a growing market from 2000 to 2005, especially in third-tier cities and rural areas, and the expected average growth rate in the country was 10%, with a nationwide total capacity of more than 1.3 million tons…after investigations and surveys in various respects, we look to further increase in the development prospect of yogurt and dairy product industry at home 73

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and abroad. “The investors are equipped with advanced and rich experience and technologies in the production of beverage and food, specialties in marketing management and abundant funds, after negotiating with various parties, we propose to use the trademark licensing of the famous brand “Robust” in China, so as to push the products of this project into domestic and overseas markets rapidly.” This is a description of “analysis on the yogurt market” from the “general information”, from which it is not hard for us to see their confidence in cooperation. What’s more, Danone Group once pledged in all sincerity and seriousness that the brand of “Robust” would stay unchanged and the operation group of “Robust” would remain unchanged as well. Meanwhile, Danone Group also satisfied the nearly “begging for money by making concessions” request from “Robust”, injecting funds immediately. However, when Danone Group gradually increased its investment quota, up until November 2001, Danone possessed the absolute right to speak with 92% of the share, as the businesses of Robust Group kept wandering, surrounded by domestic Wahaha and overseas tycoons such as Danone, the founder of Robust He Boquan wanted to leave and sold Robust to Danone. However, Danone didn’t buy all the ownership of trademarks of “Robust”, but just signed for a ten years’ period of use. We ought to say that, at the beginning of the acquisition of Robust, Danone showed a positive attitude, which was reflected in the financial statements from 2000 to 2002, in which period the aggregate profits were 154.3 million RMB, 55.34 million RMB and 93.75 million RMB respectively, and Robust was able to keep a total profit of 162.48 million RMB until 2004, but incurred loss in as early as 2005, with a total loss of 207.91 million RMB. Besides the competition from the market, the failure of Robust can find a reason from the psychology level more or less. Because of the transformation from an indigenous private enterprise to a subsidiary of a transnational company, the loss of entrepreneurial passion and the subsequent standardized management model, the original staffs of Robust could no longer find the feeling of “working” as the past, different ideas plus with different means of expression accumulated the contradictions continuously. After a year upon the takeover by Danone, five founding members leading by He Boquan were kicked out of the management layer. In September 2006, Robust began to “clean up” and adjust in a large scale, when almost 30% of the sales personnel were dismissed; in the middle and senior management of its

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regions and controlled companies, the proportion of original staffs of Robust was reduced from 70% to 20%. The most direct reason of the large-scale downsizing was the sustained depressing status of the market performance of Robust. It is understood that the management mode of Robust after being entered and hosted by Danone was: setting an independent company for barreled water, while other products would be managed by different categories, each category of products would be operated separately. Such categories included: bottled water, yogurt, tea drinks and Mizone. As the tea drinks sustained losses for years, this category was completely detached in October 2006, thus only three of the four categories were left. Bottled water was the featured product of Robust, and during the rapid growing period from 1996 to 1999, the sales volume once reached 30% of market share in China, ranking the first. However, at present, the market share of Robust bottled water was only 5%, far less than those of its competitors Wahaha and Nongfu Spring. AD calcium milk which was raised by Robust first also gained scanty profit. “Mizone” released in 2003 was a kind of products in short supply, and turned into the degenerating phase in 2006; meanwhile, consumers rarely connected Mizone with Robust, the highest annual sales amount reached 800 million RMB in previous years, but only gained 500 to 600 million RMB in 2006. In addition, the milk and yogurt products of Robust were ignored by Danone consciously or unconsciously, as from the strategies of Danone, the emphasis layout of yogurt products lied in enterprises such as Bright Dairy & Food, and it was understood that although barreled water brought a profit of 20 million RMB every year, the deficit in bottled water and tea drinks resulted in the overall loss of Robust for two consecutive years. From the high-profile “joint venture” to the collective resignation of founders leaded by He Boquan, among which there were four outstanding males and an outstanding female, then to the loss of over 100 million RMB in 2006, consequently followed by the so-called “cleaning up Robust by Danone”, the acquisition between Danone and Robust made a stir in the industry, but ended by deficit of one party and elimination of the other party. At the beginning of the acquisition of Robust, Danone didn’t show obvious intention to suppress the brand, but wished to earn some money with it. However, the operation performance of Robust went from bad to worse, as the lease term of the brand was going to expire in the near future, there was some change in the psychology of Danone, thus Danone began to weaken Robust. It was beyond doubt that when Danone chose not to actively purchase the ownership of 75

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Robust trademark at a high price in 2000 but adopted the means of lease, it actually set an ambush for suppressing this brand. In fact, Danone completely made havoc of the national brand which used to be a pride, maybe the material loss could be measured by currency, but the intangible asset loss of Robust could never be recovered. Danone once hoped to improve its profits by taking use of the sales platform of Robust, but in fact, except products of its own, Robust never sold any product of other brands, thus we can say that the sales platform was not improved, but was constantly weakened. Danone became a killer of Chinese national brands. (d) The fourth battle: overshadowing the leading role of Maling Aquarius Bottled water developed extremely quickly in China, with a growth rate of over 10% on a yearly basis. For Danone, such a huge market was quite attractive, and Shanghai Aquarius Drinking Water Co., Ltd which was the largest manufacturer of barreled water in China with an annual sales amount of over 1 million barrels was definitely the best choice for Danone. In 2001, Danone and Shanghai Maling Aquarius Co., Ltd jointly established Shanghai Aquarius Drinking Water Co., Ltd, each holding 50% of the shares. In those years, Aquarius occupied half of the barreled water market in Shanghai, when the barreled water industry was still a sunrise industry. However, when both parties proposed to set up the joint venture, one of the conditions put forward by Danone was that Shanghai Maling Aquarius (Group) Company must transfer the right to use the brand “Aquarius” to Shanghai Aquarius Drinking Water Co., Ltd. Before then, Aquarius had been paying trademark licensing fees to the group company, but after the transfer of trademark, other enterprises of the group needed to pay trademark licensing fees to Aquarius Drinking Water Co., Ltd. In 2004, after purchasing 50% of the shares of Shanghai Aquarius Drinking Water Co., Ltd and 10% of the shares of Aquarius Sales Network, Danone became an absolute leader in domestic bottled water and barreled water markets, the amount involved in these two acquisitions was nearly 180 million RMB. Thereafter, Danone fully took over the management of Aquarius and made considerable modification to the articles of association of Aquarius: change the composition of the board of directors from six to seven directors, since then Danone had one more director in the joint venture than Shanghai Maling; meanwhile, it was originally stipulated that in the first two years after the establishment of the joint venture, the general manager should be recommended by Shanghai Maling Aquarius (Group) Company, but after the

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modification, in the first two years after the establishment of the joint venture, the general manager should be recommended by Shanghai Maling, and by Danone thereafter. Since then, Danone firmly grasped the power to appoint the general manager, namely, the power to control the company. The overall operation status of Aquarius is so far so good. According to the data from Business Information of Shanghai, in the drinking water area, Aquarius still ranks the first in Shanghai market with market share of about 30%, followed by Nestle, which occupies a market share of less than 20%, and then comes Bichun, Waterman etc. This enterprise is of fairly high quality, but the ownership of which is firmly controlled by Danone. The ambitious of Danone can be taken in at a glance, which obtained the right to control the joint venture by resorting to a series of methods, and then kicked Shanghai Maling Aquarius Group Company out of the management layer; this was obviously the consistent trick of Danone: control the power of operation, and then clean up the Chinese founders. yuan (e) The fifth battle: in hot pursuit of Hui Huiyuan Huiyuan Juice is the first tycoon in domestic juice industry, accounting for 42% of the market share. Danone had casted its covetous eyes on Huiyuan for quite a long time, and after Huiyuan failed in the cooperation with Delong and Uni-President, in 2006, Danone Group finally invested over 200 million US dollars in Huiyuan Juice together with American Warburg Pincus L.L.C, FMO and Hong Kong Value Partners, and held 35% of the shares of Huiyuan Juice all together, among which Danone held 22.18% of the shares and became the most important strategic investor of Huiyuan Juice. However, the practiced capital operation method of Danone was not revealed until it entered in Huiyuan. In February 2007, only half a year after Danone invested in Huiyuan, Danone exercised its pre-emptive right during the initial public offering of Huiyuan Juice, and increased its shareholding ratio from 22.18% before IPO to 24.32% at the price of 122.3 million US dollars. Regarding this, the senior management of Huiyuan expressed that the act of Danone was mainly based on the “anti-dilution” agreement signed by both parties at the beginning of the cooperation, and it was reasonable for Danone to put in additional investment when the shares held by Danone might be diluted. 77

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However, the opponent of Danone this time was Zhu Xinli (Chairman of Huiyuan), in March of the same year, Huiyuan additionally issued 60 million shares by exercise of “over-allotment option”. After that, the share ratio of Danone was diluted to 21.3%, and the shareholding ratio of Warburg Pincus L.L.C, FMO and Hong Kong Value Partners was diluted to 8% accordingly. On the contrary, the shareholding ratio of Zhu Xinli family rose to 42.14%. Even so, Danone was still able to guarantee its position of the second largest shareholder by purchasing in the secondary market at the price of nearly 300 million US dollars. With regard to the hard-won Huiyuan, obviously Danone had expended much care and thought on the integration. Only two months after the investment, the integration between Danone and Huiyuan started officially. At that time, three senior executives of Danone in barreled water, biscuits and other businesses had always arrived in Huiyuan all of a sudden. Among them, Mao Tianci, former general manager of Barreled Water and Yili company of Danone China, acted as the executive vice president; Liu Ke, former general manager of Robust barreled water, acted as vice president of sales; and Zhang Xiangdong, former Human Resource Director of Danone China Biscuits, acted as Human Resource Director of Huiyuan Group. Now let’s come to a conclusion of our journey of exploration temporarily. After a careful review of the partners of Danone, it is very easy for us to find that, all the partners were tycoon enterprises in their subdivided industries of food market in China. They all had certain percentages of market share and brand awareness in their territories, and through these enterprises, Danone was able to expand into the industries it wanted to enter into with minor costs, and the access advantages of these partners also provided convenience to such a foreign brand (Danone) when it entered into the first-tier market and extended to the second-tier and third-tier market and rural areas. On the whole, although there were quite a few twists and turns, the invasion journey of Danone gained rich returns.

C. Danone Danone’’s localization scheme of capital invasion In short, the strategic intention of Danone is a brand operational strategy under the background of globalization—to realize localized sales of Danone brands through mergers and acquisitions, joint ventures or cooperation, and to make a profit from the strategic

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investment in local brands. From the statistical data of Danone, 70% of its turnover is indeed from the local brands. In a sense, Danone can be regarded as a powerful capital operation company. In China, Danone also continued its consistent style, and started a series of mergers and acquisitions since it established a Danone yogurt company in Guangzhou in 1987. Of course, there was certain background for the generation of such strategy. Firstly, the global business of Danone was transformed in 1996.That year, the business scale of Danone reached 13 billion US dollars, which was mainly from food and beverage, but the glass products which had previously been its main business only brought quite a small part of the revenues, thus the current board of directors made an important strategic shift, namely, to focus on the three main businesses which were yogurt, mineral water and biscuits, turning from the glass industry to the food industry, thus, a lot of mergers and acquisitions were inevitable. Secondly, the investment effect of Danone in China was not so good. Shortly after entering the Chinese market, Danone established a yogurt company in Guangzhou, but sustained losses for successive years, which even made Danone want to leave; however, the acquisition of Bright Dairy & Food brought the yogurt business with vitality again. It was the failure in direct operation and the success in acquisitions that led Danone to choose the way of acquisition. However, we have to say that the strategy of Danone was a disaster for Chinese enterprises to some extent, as Danone paved its way to realize its ambition through a series of capital invasion methods. (a) Capital invasion methods of Danone Ambition only can not lead to the achievement of a purpose. Thus, Danone used the following two trump cards to realize its own capital invasion: a. Swallowing the similar enterprises like a whale and building the monopoly position of its major business. The entry of Danone into China originally began from yogurt products which were its leading products. In 1987, being the sixth largest food group in the world and the third largest food group in Europe, Danone set up a yogurt company in Guangzhou, but gained no significant economic benefit therefrom. After two years of public relation activities, Danone finally opened a gap in Bright Dairy & Food and found a chance to develop its dairy products in China.

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We have noted that the subsequent enterprises Danone acquired in China were all its powerful competitors in the Chinese market, which especially intended to control the powerful domestic enterprises especially in dairy products and water products industry. From the water product market, Wahaha, Robust, Maling Aquarius and earlier Shenzhen Yili, which could play an important role themselves, all turned to be subordinated to Danone. As to the dairy product market, Danone easily seized Bright Dairy & Food, and incorporated Robust and Wahaha which could be said to be two leaders of the dairy product industry in China. In 2006, Danone acquired 22.2% of the shares of Huiyuan which was the first tycoon in the domestic juice industry. So far, through a series of capital operation, Danone completed its strategic layout in the drinking water, dairy product and juice product market in China. The aforementioned brands all aimed at middle and low-end consumers, and there were horizontal competitions among many of such products. b. Holding additional shares disregard of the cost, and obtaining large amount of profits in the industry A large part of Danone’s profits in China were directly obtained from the profit dividends of excellent enterprises. Therefore, Danone tried hard to hold additional shares of such excellent enterprises through various forms and means. Taking Wahaha for an example, in ten years of cooperation, Danone invested less than 1 billion RMB in total, but gained a profit of 3.8 billion RMB. The market share of drinking water, eight treasures congee and dairy products of Wahaha remained No.1 in China, and the carbonated drink, tea drinks and other products also occupied considerable market share. In April 2007, looking to further increase in economic efficiency of the non-JVs of Wahaha, Danone suddenly requested to acquire 51% of the shares of Wahaha’s non-JVs at a low price based on the reason that the products of the non-JVs arbitrarily used the “Danone” trademark without authorization of the joint venture’s board of directors and violated the Trademark Licensing Agreement signed by both parties in 1996. Dissatisfied with Danone’s equity expansion behaviors, Wahaha exposed Danone’s intention to acquire Wahaha; as a result, the contradiction between them became increasingly fierce. (b) Capital invasion controlling methods of Danone Cooked duck may also fly off. In order to hold the profit in hand, the importance of control can never be ignored. a. Gradually realizing holding with the help of capital, and aiming to merge 80

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In a series of participation and acquisition behaviors of Danone, people were mostly interested in the attitude alleged by Danone to these Chinese national brands, which could be summarized as the following two aspects: (a) the share of the enterprises shall be held by Danone, but which would not appoint any staff to participate in the management, and the acquired brands still owned trademark right, the power to administrate and the right to develop the products and market; (b) the acquired enterprise participated by Danone could obtain the right to use Danone trademark for free. Such attitude can be described euphemistically as not only had taken account of the national mood of Chinese people, but also weakened the internal friction of the brands, thus hostile enterprises became fellows, and the process of market shuffling was completed with ease. Such strategy of Danone was expressed incisively and vividly when acquiring Robust. Danone was not interested in establishing a real strategic alliance, but regarded it a means of development to acquire other enterprises and to occupy the assets of other enterprises. The general route of Danone’s capital investment could be summarized as participation, holding, controlling in all aspects and cashing out. The aim of Danone was undoubtedly to push its proprietary brands to the front, but as analyzed above, it seemed that such strategy didn’t receive the desired effect. When Robust broke down, Danone got no benefit; instead, the enterprise image of Danone was seriously hurt in China. After the contradiction between Danone and Wahaha became increasingly fierce, the media raked up the past and magnified it to the front of the public; as a result, the brand image of Danone suffered a disastrous decline in China. b. Cleaning up the founders and controlling the power of operation After acquiring Robust and Aquarius, Danone made structure adjustment to the management layer, so as to firmly hold the power of operation, but this was widely divergent with the previously boasted principle of “dispatching no staff to participate in management”. Nowadays, when people look back on the failure of Robust, they always connect it with the incomprehension of the new management layer with the local market in China. c. Serving the overall interest but ignoring the development of individual enterprise Danone had its own strategic intention when acquiring Robust, and its original attitude was also complicated. We should say, Danone showed a positive attitude at the beginning of the acquisition of Robust, which was reflected in the financial statements from 2000 to 2002, in which period the aggregate profits were 154.3 million RMB, 55.34 million RMB and 93.75 81

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million RMB respectively, and Robust was not able to gain total profits of 162.48 million RMB until 2004, but incurred loss in 2005, with a total loss of 207.91 million RMB. When the business performance of Robust was not entirely satisfactory, Danone didn’t endeavor to save this brand, but ignored it consciously or unconsciously. In the biggest family of Danone, the main layout of yogurt turned from Robust to enterprises such as Bright Dairy & Food (subsequently, as the yogurt business was badly run, Danone also gave up the cooperation with Bright Dairy & Food); And Robust tea drinks had almost vanished from the market, the business of barreled water kept shrinking and almost reached the break-even point; on the other hand, the market share of all the brands of Robust shrank as well, and “Mizone” was the only brand cultivated by a large amount of money, but consumers rarely connected Mizone with Robust. Danone was inclined to treat the acquired Chinese enterprises as a group company, if the business of one subsidiary was operated not well, Danone would shifted its focus to another subsidiary. However, in fact, such enterprises were not subsidiaries serving to the group, but competitors who would fight to the bitter end in the market. It seemed that Danone was destroying enterprises one after another, while operated capital with skill at ease itself. So far, we should have been clear about the general skeleton of Danone’s invasion history in China. (c) A thorough analysis of capital invasion risk The importance of Danone’s internationalized acquisition strategy to the proudful achievement of Danone today can never be ignored, but there are obvious defects and problems in such strategy. a. Intensifying horizontal competition, increasing the difficulty in control and violating business rules Since Danone entered into China, it has participated in domestic enterprises such as Wahaha, Robust, Bright Dairy & Food, Huiyuan, Mengniu and Maling Aquarius, which aimed at middle and low-end consumer group, and there were horizontal competitions among many of such products. This was especially obvious in the cooperation between Danone and Mengniu. When Danone fostered the development of yogurt business of Mengniu, it formed direct confrontation with that of Bright Dairy & Food, as a result, the performance of Bright Dairy 82

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& Food kept sliding down, and it was even heard that Bright Dairy & Food would give up its yogurt business. And there was also horizontal competition in Robust and Wahaha which was equity participated by Danone. Wahaha and Robust were known as members of “three Kings in the water market” previously, but the dominant position has been lost for a long time. It was even harder to coordinate and control enterprises with similar businesses. After acquiring Robust, as Danone didn’t do well in the control and integration of the water businesses of Wahaha and Robust, it sustained losses for successive years. Thereafter, people generally considered Danone to be not good at operating. For Bright Dairy & Food and Robust, horizontal competition was just like chronic suicide, but as a foreign funded company, Danone would not worry about that as it was a waste of the market resources in China and of the emotion of Chinese consumers. However, this kind of practice was forbidden by business rules worldwide. Danone occupied positions of board of directors in the above brands which had direct competition relationship between each other, but sat there watching them fight with each other, and seized the chance to push its proprietary brands to the front. b. Putting in investment only without any technology, which caused dissatisfaction As mentioned above, when Wahaha cooperated with Danone, it hoped to get the support of core technology from Danone rather than capital assistance, as Wahaha was not short of money at that time. However, Danone never gave Wahaha what it dreamed of. It was stipulated in the cooperation agreement that Danone would provide Wahaha with technology assistance for free, but that was never realized, regarding which we only need to have a look at the product structure of Wahaha: if there had been any technology provided, there would have been Wahaha yogurt a long time ago. Danone only provided some suggestions to Wahaha in non-core technology which was of little use to Wahaha, such as a design of bottle shape. As a matter of fact, Danone had powerful research and development ability, Wahaha once hoped Danone to develop new products for Wahaha, but Danone provided no help, from “Future Cola” in 1998 to “Nutri-express” in 2005 and then “Coffee Cola” in 2006. Bright Dairy & Food, another partner of Danone, also wanted the core technology of Danone, but also came to nothing. The yogurt cooling-free technology of Danone had been successfully developed, the products of which sold well, but no such product was seen in China. This kind of behaviors of Danone had aroused strong dissatisfaction and protest from its 83

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cooperation partners, among which Wahaha protested most fiercely. The partners of Danone thought that, no matter whether Danone did conduct the behaviors or not, the finally results were not satisfactory. In short, it was impossible for the Chinese partners of Danone to get core technology from Danone. c. Political and legal risks growing quickly Developed countries such as the U.S.A, Germany and Japan and many developing countries began foreign capital review and antitrust legislation a long time ago, so as to prevent foreign capital from controlling domestic industries, conducting monopoly and then threatening national economic security though mergers and acquisitions. While exploring and developing in the national market, Chinese enterprises also encountered the influence from antitrust laws which imposed restrictions on foreign capital mergers and acquisitions, for example, when Lenovo, China National Offshore Oil Corporation and other domestic famous enterprises attempted to explore the overseas market and implement transnational mergers and acquisitions in previous years, they were all reviewed by the state antitrust organizations or committees on foreign investments where the merged and acquired enterprises located. Therefore, Danone’s strategy to merge and acquire leaders of the corresponding industries in China would definitely trigger political and legal restrictions and interventions. Reviewing foreign capital malicious mergers and acquisitions and monopoly through legislation was not only in accordance with the international trend, but also an embodiment of the principle of equivalence in international exchanges, and again an efficient legal means to guarantee the economic security and to assist domestic enterprises. In particular, the animatedly discussed event of “Danone forcedly acquiring Wahaha” gave rise to much concern about the fate of national brands and enterprises, to which the government also gave a great deal of attention, and appealling for legislation from the society to restrict foreign capital monopoly rose here and subsided there. Among foreign capital, only Kodak and Danone merged and acquired the whole corresponding industries in China. In those years, Kodak invested 1.2 billion US dollars to merge and acquire and restructure six major film factories except Lucky Film through the “98 agreement”, and as a return, within three years, Kodak would have the franchise of the film market in China. However, the dominance position in film market bought by Kodak could not prevent the trend of the whole industry from turning to digital. As of today, the industry is still laughing at Kodak for its behavior to acquire the “sunset industry”. However, 84

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Kodak did not rely on a series of mergers and acquisitions to stand firm in China, but on numerous chain stores developed from the brand. The practice of Danone’s mergers and acquisitions was to make short-term use of the local resources in China, and then gradually move towards monopoly, and to weaken and eliminate the Chinese enterprises, but at the same timem its proprietary brand effect was not brought into sufficient play. The real thing that Danone needed to internationalize was its proprietary brand; blind mergers and acquisitions may bring capital effect in a short term, but was disadvantage to the long-term development of the brand. Meanwhile, after the exposure of the dispute between Danone and Wahaha, Danone’s capital plunder was strongly resisted by Chinese people. Danone’s blind mergers and acquisitions deserve deliberation, as anyhow, cultivating consumers’ attention to free brand is the only way for enterprises to succeed. (d) Analysis of Danone Danone’’s control mechanism Since formally entered into the Chinese market in the late 1980s and early 1990s, Danone kept attacking cities and seizing territories and expanding rapidly, and has occupied some place in the food and beverage industries in China. Carefully analyzing Danone’s control of joint venture and acquired enterprises, we can summarize three major aspects of its control mechanism, from which domestic enterprises can regulate effectively from the corresponding aspects and seek policies in response when encountering capital operations such as setting up joint ventures and mergers & acquisitions. a. The core lies in the power of control The investment and acquiring parties can be divided into capital investors and industrial investors. The former intends to invest, so they rarely participate in management, while the latter is of more complex strategic motivation, and besides the input of capital, they also bring enterprises with advanced technology workmanship and managerial experience. On account of the capital operation of Danone, it was more like an industrial investor, but domestic enterprises often overlooked the power of control when jointly investing or cooperating with Danone, and were enslaved to the foreign party in management, which led to slow learning of technology. b. The key lies in the learning mechanism In the process of jointing investing with Danone, domestic enterprises tended to regard funds, 85

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technology and management as important, hoping to learn technology, management and experience of Danone through joint investment or merger & acquisition, so as to strengthen themselves. However, as a large-scale transnational enterprise which pursues profits and market control, Danone was neither a philanthropist nor a preacher. For domestic enterprises, haste made waste, so they were finally controlled even deeply. c. Establishing a non-equity balance mechanism Besides equity structure, there are some other important powers of company management which should not be ignored, such as the control power of governance structure, of organizations, of cultures and of core competence. These are all factors that Danone values. In retrospect of the “Danone-Wahaha Event”, an important reason why Wahaha was able to prevent itself from corroding was its emphasis on the establishment of non-equity balance mechanism, so that it could effectively control the core resources based on which it was able to survive, such as brands, sales channels and human resources, and guaranteed the control over the right to operate the joint venture, and then guaranteed the control over the governance structure of the joint venture.

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Chapter Ⅴ French SEB: Enjoying a Feast of Capital After entering into the 21st century, in order to perform our commitments to WTO, the government relaxed the related restrictions on foreign investments in China, which provided much convenience for foreign capital to merge and acquire domestic enterprises, and mergers & acquisitions have become increasingly important methods for foreign capital to expand in China. French SEB is exactly such a transnational company with huge destructive power, which successfully acquired Chinese home appliances enterprise Supor with 2.31 billion RMB in November 2007, thus starting the capital war in the home appliances industry in China.

A. SEB: huge market of small appliance French SEB is a well known large-scale enterprise in cooking equipment (pressure cookers, non-stick pans, etc) and small appliances (electric irons, electric cookers, dust collectors, etc) in the world, with subsidiaries such as French Tefal and German Rowenta, standing in the leading position in non-stick pans, electric irons, electric fryers, electric steamers markets. The sales amount of its electric irons, electric kettles, electric steamers coffee pots, food processors and electric fryers all rank the first in the world. In every second, six consumers will choose SEB products simultaneously worldwide. So far, listed in Paris Stock Exchange in 1975, SEB has a long history of over 150 years. SEB has a sales network in six businesses (kitchen wares, flameless cooking utensils, food utensils, beverage utensils, clothing nursing utensils, housing comfort utensils and housing cleaning utensils) extending over 120 countries and regions in the world, 20 manufacturers in Europe, America and Asia. It employs over 14,000 staffs, with French Lescure family being its major holding party. In 2001, SEB acquired its biggest rival in France, which was Moulinex, and thus consolidated its dominance in domestic small appliance market. In 2005, SEB realized a global sales amount of 2.463 billion Euros, 70% of which came from countries and regions outside France, so we can easily see its dependency on the international market.

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There are broad prospects in the growth of the small appliance industry, and there is also a trend of leading by export and rapid growth in domestic sales in China. Chinese families own less than ten sets of small appliances on average, which is far less than 20 to 30 in European and American families. With the growth in the living standard and the increasing value in small appliance products, all kinds of personalized small appliance products are gradually coming into Chinese families. In front of the huge market with a population of 1.3 billion and 350 million families, SEB Group decided to make a long-term investment in China as early as ten years ago, and established a joint venture in China in 1996. The enterprises it invested in China and especially in Shanghai kept bringing excellent performance for SEB. In 1999, French-owned Shanghai SEB Electric Appliances Co., Ltd was established, which was praised as Double Excellence Foreign Funded Company for two consecutive years in 2001 and 2002, and won Comprehensive Efficiency Award, Award for Export Achievement and Award for Investment Achievement for foreign funded companies in Minhang District of Shanghai. In 2001, Shanghai SEB moved into the Xinzhuang Industrial Zone of Minhang District, and held an opening ceremony for the newly-built factory. Therefore, the output of SEB appliances rose, indicating that SEB Group would lead its subsidiary famous brands such as Tefal and Rowenta to explore the small appliance market in China. After this move, a new factory floor of 10,000 square meters was set in the Xinzhuang Industrial Zone, making Shanghai SEB Electric Appliances Co., Ltd an important production base of SEB Group. The sales amounts of its major products Rowenta electric irons, Rowenta dust collectors and Tefal electric steamers all ranked the top three, and were sold to 30 countries and regions. SEB was good at expanding its strength with the help of mergers and acquisitions. In recent years, the group acquired Italian Lagostina, American All Clad, W.M.R and other well-known brands in succession, and occupied 24% of the market share of the similar products in the world. Because the labor cost in France was too high, SEB gradually got into trouble in recent years. In early 2006, SEB announced to shut down three of its production lines in France, as the products made there were no long competitive in price. In 2005, the sales amount of SEB was 2.463 billion Euros, but the profit was only 103 million Euros, which was 21.4% lower than that of the previous year. As the European market got increasingly saturated, SEB regarded it an important means of rising abruptly again to enter into the Chinese market.

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SEB attempted to move its production and sales center to China through connections with Chinese companies, thus it would not only obtain huge market, but also reduce its labor cost. (a) “Hongxin” didn’t exist any more The electric iron advertisement which appeared on the screen in Shanghai aroused many memories and concerns of numerous old Shanghai people: why did “Hongxin” no longer exist? “Hongxin” was a brand of electric irons produced by Shanghai Electric Iron Plant, which once accounted for 47.4% of market share in China, and as high as 87% in Shanghai, the evaluation value of the brand reached 130 million RMB in 1993. Nowadays, Shanghai Electric Iron Plant and Shanghai Hongxin Appliances Co., Ltd which once brought an annual sales amount of 250 million RMB are empty chairs at empty tables, and the brands have been acquired by certain private enterprise from neighboring Zhejiang Province. Talking about this period of history, we can never ignore the cooperation between Shanghai Electric Iron Plant and French SEB ten years ago. In April 1996, SEB and Shanghai Electric Iron Plant jointly invested 16.5 million RMB (with SEB contributing 60%) to establish Shanghai SEB Electric Appliances Co., Ltd. There were five members in the board of directors of the joint venture, three of which came from the French party. However, the cooperation did not bring the desired effect. By using controlling stake, the French party changed “Hongxin” into a processing workshop, and transferred profit by high-price-in and low-price-out; with the help of the sales teams and human resources accumulated by the Chinese party, Tefal and Rowenta of SEB were able to enter into hundreds of commercial centers in Mainland China with low cost, which carried out store segmentation, “Hongxin” focused on the location, while the brands of the foreign party aimed at high-end consumers. Because of the significant discrimination in promotion strengths, the market share of “Hongxin” shrunk to 20%. The Chinese directors repeatedly required to introduce or develop new products, but were rejected by the French party, meeting hindrances everywhere; there were continuous conflicts in the board meetings, and the joint venture lost an aggregate of 30 million RMB, while the financial statements were passed in each year. In 1999, the French party took over the joint venture in entirety and changed it into a sole proprietorship, thus the Chinese party was impelled to leave. At that time, the market share of Hongxin electric irons dropped to over 20%. “Three years of cooperation brings about three years of deficits.” Shao Feiran, former general manager of the 89

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Chinese party of Shanghai SEB Electric Appliances Co., Ltd jointly funded by Shanghai Electric Iron Plant and SEB, expressed on a high level forum after this acquisition. He also indicated that, under the wave of acquisition by foreign capital, we should attach importance to protection and development of independent brands and beware of new traps of foreign-capital mergers & acquisitions. Then, how did French SEB draw “Hongxin” into the trap? Through analysis, we can find that the company has laid out four tips: The first trip: holding the joint venture, causing the joint venture to be under deficit, and then turning it to a sole proprietorship. Data shows that the budgets of the joint ventures were to be under deficit for three consecutive years, although the Chinese party strongly advocated coming up with solutions, as the French party occupied 60% of shares and three seats out of five directors, such budgets were passed each year. The second trip: appropriating channels. After establishing the joint venture, the French party made full use of the channel network resources and people network accumulated by elaboration of “Hongxin” in dozens of years. With support from the strong sales teams of “Hongxin”, Tefal and Rowenta of SEB were able to grow out of nothing, successfully entered and were stationed in several hundred commercial centers in large-sized and middle-sized cities in China, and controlled the terminal of channel consumption with low cost. The third trip: brand differentiation cooperation. When swallowing the channels of “Hongxin” like a whale, the joint venture also orientated “Hongxin” to be low-end, but orientated its own products to be high-end, and promoted with store segmentation. Because of the significant discrimination in promotion strengths and expenses, “Hongxin” finally vanished from the market, and was replaced by Tefal and Rowenta. The fourth trip: transferring profits. At the beginning of the acquisition, the foreign party first took full control of the advantage resources such as channels of the acquired brand, and after grafting to its own brands; it would suppress the Chinese brand, and sweep the deck from high-end market to low-end market through the premium ability of international brand and brand dislocation. By monopoly mergers and acquisitions as well as brand assaults, the foreign capital fixed the role of domestic enterprises to be workers in the international industrial division pattern with money. SEB changed “Hongxin” to a processing workshop by exercising the controlling stake, purchased at low prices in China, but sold at high prices 90

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in the world, deficit in China, but gained overseas, thus the profits were taken away “reasonably and legitimately”. (b) Supor merged with SEB On August 14, 2006, Zhejiang Supor, the domestic leader in the cooker industry, announced to sign a strategic cooperation frame agreement with SEB, which indicated that Supor would introduce strategic investment from French SEB through negotiating transferring, directional add-issuance and partial offer. After the acquisition, SEB would hold 61% of the total stock issue of Supor, and become the controlling shareholder of Supor. On August 31, the extraordinary general meeting of shareholders of Supor adopted the acquisition proposal with as many as 96.4% of the votes. According to this agreement, Supor would issue 40 million additional A stocks tailed for SEB, and the holding shareholders of Supor, Supor Group, Su Zengfu and his son, would negotiate about transferring 25.32 million of restricted tradable shares to SEB at the unit price of 18 RMB. What’s more, SEB issued a tender offer report to all the shareholders at the same time, indicating that SEB would acquire 66,452,084 shares at the unit price of 18 RMB. After the completion of all the transactions, SEB would hold about 52.7% to 61% of the shares and become the absolute controlling shareholder of Supor. It’s revealed that SEB negotiated with Supor about cooperation as early as ten years ago, but failed at last, when SEB only became a client of Supor. The English abbreviation of Supor was SBE, which was slightly different from SEB in alphabetical sequencing. Like many other Chinese enterprises, Supor was also an OEM client of SEB in China. Before Supor was listed in 2004, both parties got in touch again, but as it was “not a good timing”, the negotiation failed again. Since the second half of 2005, both parties suddenly speeded up the negotiation process of acquisition, subsequently Su Xianze, the chairman of Supor Group, went to France in personal, and both parties finally agreed on the acquisition scheme. This acquisition caught people’s eyes from the very beginning, the whole process could be said to be full of twists and turns and breath-taking. Since SEB made its bow into the acquisition process with Supor in August 2006, there were continuous hinders along the way. Firstly, six enterprises in the industry objected to the acquisition on antitrust grounds. After the acquisition was approved, Supor Group became unable to transfer its equities as restrained by the commitment to conduct share reform, but SEB would rather acquire the shares of Supor in the secondary market with another 1 billion RMB than give up the 91

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controlling stake of Supor. Having the lesson drawn from the joint investment between Shanghai Electric Iron Plant and French SEB, this acquisition immediately aroused close concern from experts and insiders. What kind of strategic cooperation did Supor put forward in the announcement? Would it be foreign capital monopoly in the cooker and small appliance industries therefrom? As a famous enterprise of national brand, Supor had established its leader position in the industry after years of development. According to the information provided by China Industrial Information Issuing Center, the pressure cookers produced by Supor occupied 47.04% of the market share, and obtained a sales amount of 990 million RMB and an export amount of 560 million RMB in 2005, which was almost half of the total amount. Even so, with the existence of other enterprises such as ASD, there were still benign competition relations. However, once SEB completed the acquisition of Supor and held sufficient shares to hold the company, with the original market power of Supor and the enormous foreign capital, the original competition relations inside the industry would be broken, and there would be an inevitable situation under which a single enterprise dominated exclusively. Of course, the “self-selling” practice of Supor enraged ASD and another five enterprises, which submitted a letter in joint names. Why did this happen? These cooker enterprises held many OEM orders with them. After SEB acquired Supor, of course, rich water should be kept in one’s own fields, and that was exactly the reason why ASD and other enterprises were so discontent with the transaction. It was kept hidden from knowledge that SEB not only talked about cooperation with Supor, but also kept negotiating with ASD about setting up a joint venture. Both Supor and ASD were all counted as one of the very best in domestic tableware industry. In 2004, the sales amount of Supor was 1.7 billion RMB, while that of ASD was 1.2 billion RMB. In the list of noted brands, Supor ranked the 96th, while ASD ranked the 97th, and the brand value of Supor was 1.6 billion RMB, while that of ASD was 1.59 billion RMB. Specific to the market share of products, regarding pressure cookers, Supor occupied 20.89%, Double Happiness occupied 21.59%, and ASD occupied 15.70%; regarding non-stick pans, Supor occupied 20.87%, and ASD occupied 10.20%. From the foregoing rankings, we can conclude that, after SEB entered in China, no matter whether it cooperated with Supor or ASD, the territory of Chinese tableware industry would be changed, monopoly would likely be formed, and the base line of Regulations for Merger with and Acquisition of Domestic Enterprises by 92

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Foreign Investors issued by the Ministry of Commerce would possibly be touched. It was expressly stipulated in the antitrust regulations that, in event that the sales amount of the acquiring party in China exceeded 1.5 billion RMB or the market share of it reached 20%, or the acquisition caused the market share of one party exceed 25% or consecutively acquire ten enterprises within a year, the corresponding party should report to the Ministry of Commerce and State Administration for Industry & Commerce. This time when SEB acquired Supor, it touched three out of the four red lines, thus it was definitely impossible for SEB to cross the legal hurdle. In addition, it aroused boycott within the industry. The competitors ASD and Double Happiness had converted enemies into friends in order to resist the foreign invasion they were facing with, and had initiated vigorous government relation activities. After more than half a year, this acquisition was finally officially approved by the Ministry of Commerce of China. The Ministry of Commerce agreed in principle that Supor Group, Su Zengfu and Su Xianze could transfer 9.71%, 4.24% and 0.43% of the shares of Supor at the unit price of 18 RMB respectively, which were 25,320,116 shares in total. In addition, the Ministry of Commerce also agreed Supor to issue 40 million additional A stocks tailed for SEB at the unit price of 18 RMB; agreed in principle that SEB could acquire no less than 48,605,459 shares but no more than 66,452,084 shares by means of partial offer. After the acquisition, SEB would hold 52.74% to 61% of the shares and become the absolute controlling shareholder of Supor. Meanwhile, SEB may not transfer its shares of Supor within 3 years. At this point, this acquisition which aroused investigation by the Commerce Department and which was called “the first foreign capital acquisition under full circulation” was finally settled. It was an important measure for SEB to acquire Zhejiang Supor Cookware Co., Ltd when SEB was in trouble and desired to change. By acquiring Supor, the sales amount of SEB Group in China would account for over 30% of its total sales, but before that, the sales amount of SEB Group in China accounted for only 10% of the total sales. As the labor cost in France was 30 to 50 times of that in some Asian countries, the products of SEB were of less and less price competitiveness. Its market share in France and even Europe was nibbled up by some small appliance enterprises in Asia, and if it was not to look for a way out, it could only sit there still waiting for death. On the contrary, after SEB 93

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acquired Supor, it had the chance to lower its production cost down to the same level as other Asian enterprises, plus with its inherent technology advantages, it could still take the lead in small appliance industry of the world. Did SEB overbid when it acquired with 2.3 billion RMB? At that time, the small appliance market in China had become more and more mature, and Supor occupied the most market share, stable sales channels and high brand awareness. Under this circumstance, if SEB chose to act on its own and start from the very beginning in China, it would cost far more than 2 billion RMB, and the risk would be huge. For an old European enterprise which must find new economic growth points, it was rather cost-effective to acquire the first brand in the small appliance industry in China with less than 1/10 of its annual sales revenues, and at the same time possess the whole sales channel of the acquired enterprise in China, occupy over 20% of market share, and obtain “made in China” with low cost, and such investment would definitely bring SEB with abundant return in the future. However, was the transaction cost-effective to Supor? Regarding this, many people showed their concerns. First, SEB owned complete industry chain and abundant product types in home appliance and cooker industries, part of whose products were coincident with those of Supor. Thus, the acquisition by SEB would definitely bring horizontal competition between the parent company and the subsidiary. Therefore, in the agreement, both parties delimited “the boarder of two opposing powers”, in which Supor was oriented to be a brand with “competitive entry level price” and the reserve for the middle-end and high-end brand Tefal of SEB. Obviously, Supor would open up the Chinese market for the promotion of SEB medium and high grade products with its own sales channels, but limited itself within the orientation of primary brand. In the purchase agreement between both parties, the technology output from SEB to Supor was relatively intriguing. According to the stipulation, Supor would turn to be a research and development base of SEB in China, and SEB would grant Supor with technology license according to Supor’s technology demands to improve OEM products. However, this was definitely not for free, as Supor would pay SEB with licensing fees according to certain proportion of net sales, which would be determined by both parties based on 3%. Although SEB committed to Supor that the gross profit would be about 18%, SEB was still able to make some profits from technology transfer, and SEB still had some advantages in its cooperation with Supor. 94

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Besides the brands, both parties also delimited their respective sales territories. At that time, Supor had set up markets in China and Southeast Asia, on which Supor undertook to focus, and if it was to extend market afterwards, it would choose such countries as where SEB had set effective network; meanwhile, the distribution channels and logistics chain would be determined according to the global sales strategy of SEB. As SEB had set up a wide range of efficient networks worldwide, with commercial networks in over 120 countries and regions, except China and Southeast Asia, Supor had very limited development space elsewhere. It is worth noting that after hard work, Supor had achieved proudful achievement in cultivating independent brands. And after being acquired by SEB, it was vein to expect the foreign invested party to cost anything on “Supor”. On the contrary, Supor was likely to recommit the same error as Shanghai Electric Iron Plant in cooperation with SEB. (c) Brand strategy: product differentiation In 2003, the world’s largest small appliance enterprise French SEB Group launched its strategy in China, when it not only released numerous advertisements at the cost of 15 million RMB, but also reduced the market prices of all the products it manufactured. Therefrom, the brand culture invasion war was initiated. This time, SEB used Tefal streamline enamel bottom plate electric iron, SEB’s flagship product with the most sales amount in the world, as a “stepping-stone” to enter into the Chinese market, and spent 15 million RMB to implement advertisement bombardment on TV and buses. The market price of this kind of product imported from France was over 800 RMB, but was reduced to about 300 RMB in the Chinese market, and the price gap between SEB and local brands shrunk from 600~700 RMB to current 100~200 RMB. Before then, SEB had set up a production base in Shanghai, about 10% of the products were sold in China, and the value of the production base was about 400 million RMB. Although as to brand awareness, SEB was unknown to the public in China, not like Philips and Panasonic which were very popular among the consumers who had heard about them for many times. From the actual situation, the products of SEB sold not bad. In 2002, the sales revenues of SEB were nearly 400 million RMB, when Philips, the leader in the market, gained just 600 to 700 million RMB in the small appliance field, which number also included the sales revenue from its flagship product, namely, electric razor. In 1996, after SEB established a joint venture with Hongxin, both parties once debated on whether to sell the products at the brand of the subsidiaries of SEB or Hongxin in the 95

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Chinese market. According to years of market experience and survey results, SEB mainly attacked Beijing, Shanghai and Guangzhou (accounting for 60% of market share) with concentrated resources first, but gave up Chengdu and other inland cities. On November 11, 2003, SEB announced the plan of investing 15 million RMB in TV advertisements, so as to promote its newly released Tefal iron products. This should be the first time electric iron TV advertisement was released in the Chinese market in recent ten years. The content of the advertisement was that: after a cat knocked down a Tefal electric iron, the iron rushed out of the house and rushed to the street. On the one hand, the advertisement highlighted the slippery characteristic of the enamel bottom plate of new Tefal iron; on the other hand, the advertisement highlighted the precipitant determination of Tefal products among the city crowd. The advertisement brought excellent effect to the promotion of the awareness of Tefal products. Besides Beijing, Shanghai and Guangzhou, SEB also chose other eight cities such as Tianjin to be the second tier for the sale of SEB small appliance products. The sales amount of the eight cities of the second tire accounted for 20% of the total sales in the domestic market. SEB mainly strengthened the brand by store display and in-store promotion, in which SEB invested several millions of RMB. Learning from the lesson from Hongxin distribution system which extended too widely, SEB strictly carried out the policy under which each regional market distributed exclusively. After drawing in the market areas and distributions’ stand, the remaining task was to develop the product line, and then use the product as a pivot to develop each sub-brand of its subsidiaries. Taking Rowenta electric iron for example, there were as many as 22 types of electric irons produced and sold in China, which were more than twice that of its rivals. These irons were of different shapes and different functions, adding much choice space for consumers while making them dazzled. This was the brand strategy of SEB. As from the founders of the group, SEB considered that small appliance products were of no high technology, but only attracted consumers from functions, shapes and even styles. This relied on some innovations on functions and parts on the one hand, and relied on developing the new through critical assimilation of the old on the other hand. SEB paid more attention to small home appliances, and confronted the brand protective umbrella strategies of other manufacturers with product differentiation, and at the same time solidified its own brands through dissemination and communication.

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C. National enterprises: strictly defending enterprise sovereignty Since the reform and opening up, China’s home appliances industry has developed rapidly and has become China’s most fully competitive industry. However, there are many born defects in such industry, in general, the sluggishness of the system reform makes Chinese home appliance enterprises struggling to cope with the irrational price competition, remaining no power to research and develop their own core technologies, and eventually makes the home appliance industry an assembly industry without core competitiveness. At present, there are three obvious flaws in the development of the small appliance market: the competitive order of the market is confused; scale enterprise is in great need, the input in product innovation is insufficient, the homogenization competition between products is tense; brand construction is paid insufficient attention to, and it is difficult for the band to form consumption extra added value for consumers. After nearly 20 years of development, the domestic home appliance industry has become more and more mature. In the major appliance field, the trend of oligarch striving for hegemony will not be significantly changed in the near future, the profit of which is less than 10%, about 5% or even lower, while the profit in small appliance remains more than 10%, thus it is of great temptation to the major appliance enterprises which attach importance to profit. The huge market space and unordered market competence just provide the large-scale enterprises which are good at campaigns in group with superexcellent market chance. For the major appliance enterprises which have suffered a lot from the low price battle, they are determined to obtain the profitable small appliance industry, thus Chinese home appliance industry seems to see the hope and the flush of dawn suddenly. The high profit and great demand of small appliances which have not entered Chinese families have drawn attention of the brand tycoons which have difficulty in obtaining outstanding achievements, the profit of small appliance is rather high, but how much longer will it last? According to the analysis by insiders, from the actual condition at present, the condition of small appliance industry is nearly the same as that of the major appliance market ten years ago: with few large-scale enterprises, few brands, few product types, low cost performance, no guarantee in quality and after-sales service, and the consumer groups are still developing. As the branding, enlargement and ordering are still not mature, the competition in the small appliance market tends to be low-level fight among the numerous “screwdriver factories”, and the market capacity is far from saturated, therefore, it is normal 97

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for the small appliance market to bring about high profit. It is just because the small appliance industry is profitable that everyone wants to have a finger in the pie, and many miscellaneous brands have participated in such industry, leading to the current condition of small appliance products to be: of numerous brands, while few of them have actual advantages, and there are small gaps between them. After entering into the small appliance industry, many home appliance enterprises conduct OEM, without production line, workshop, technology or human resource input, although the cost can be saved and the risk can be reduced, the quality of the products is without security, and pretty hard to be drawn away from the miscellaneous brands. Now that the tycoons of major appliance field have turned to small home appliance, the foreign home appliance manufacturers will neither make nothing of it, but join the competition in succession. There are many “excellent traditions” in the home appliance enterprises, for example, they are high on low-level price battle, mutilations in the same industry and quarrels between brothers are often seen, the competition moves are not normative, and so on, which make the profit space narrower and narrower, and none of them has enough profits while still alive. The turbulence of the industry and the continuous aggravated vicious competition has made the lives of Chinese home appliance enterprises even more difficult. Taking the electric iron market for an example, the industry which we were proud of is exposed to attacks from the front and the rear. In 2007, influenced by the down regulation of the import tariff rate and the trade barriers implemented by European Union and countries such as Brazil and Argentina, the growth rate of electric iron export in China dropped. At the same time, Chinese electric iron market was converging attacked by home and overseas policies. Since June 1, 2007, China adjusted the import and export tariff rates of some goods. In particular, relative low temporary tariff rates would be applied to 209 items of goods including electric irons. It was not unexpected for the industry when Chinese electric iron market was converging attacked. Although the export volume of Chinese electric irons has exceeded 100 million, they were exported mainly by means of OEM, and the brand influence was relatively weak. Even in the domestic market, electric irons of foreign brands also occupied half of the market share. 98

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In October 2006, among the top ten electric irons enterprises with the most retail occupation ratios in 250 cities of China, three foreign brands including Philips, Panasonic and Tefal occupied nearly 45% of the retail share; among the domestic brands, Ningrui, Hongxin and Haier which ranked the top three occupied about 5% respectively, while the remaining domestic famous brands occupied tiny shares, about 1%~4%. In addition, the prices of domestic brands were also lower. Just think, would it still be like this if old national enterprises such as Hongxin were not broken down by SEB? Unconsciously, we helplessly watched SEB embezzling our market with various manners and enjoying a Chinese feast. After SEB successfully acquires Supor, there will be an increase in the unemployment of the same industry. The cooker industry belongs to the labor-intensive industry, with 300,000 employees, the enterprises spread over many provinces in China, which are the major resources to absorb local labors, gain profit and hand in taxes. Once the acquisition succeeds, the benign competition in the current industry will be replaced by price battles, advertisement battles and other vicious competition, which will cause many domestic enterprises to go bankrupt, lead to much unemployment, affect the local economic development, and at the same time bring social instability factors to many places. From the motivation of capital, financial capital chases short-term interest and brings little damage to the industry; while industrial capital chases long-term industrial control power and brings great damage to the ecological industry. In the world, it was industrial capital that entered into domestic chemical industry first, and the early national brands have almost disappeared. These are all enough to evoke our national enterprises to learn to protect themselves and strengthen themselves. Whether state-owned enterprises or private enterprises, when making contact with foreign investments, they must firmly keep their power of operation, and dare to safeguard the rights and interests of the Chinese party. Otherwise, the consequence will be unimaginable. In particular, they should attach importance to the right and interest protection of the independent brands, which is the most valuable “enterprise sovereignty” and which should not be given up.

ion D. Introspect Introspection ion:: reviewing foreign capital again The case of French SEB acquiring Supor has aroused continuous attention and widely 99

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discussion among all walks of life. People can’t help worrying that, when a foreign investor acquires a domestic enterprise, will it constitute industry monopoly, and will it endanger the industrial security and economic security? Up till now, it seems that the Chinese government and the folk have never loosed the review of the foreign capital’s role in the economy of China. From the rational perspective, foreign capital has extensive influence to our country, including both positive role and negative effect. The positive factors are mainly expressed in that, foreign capital can bring in advanced technology and mature management experience and enhance the competitiveness of domestic enterprises; reduce excessive competition inside the industry, give full play to the economics of scale, and form a scale economy. However, it should not be ignored that the ultimate goal for foreign capital to carry out capital operation and mergers & acquisitions is to occupy the market and obtain profit to the largest extent, and its fundamental goal is to serve to the realization of the multinational company’s global strategy, which will definitely bring negative influence to the development of national industry, the optimization of industrial structure and the realization of economic boom in China. Then, there is another question followed: do we still need foreign investments? From economics perspective, foreign capital merger & acquisition is only a universally efficient form and market means of absorbing FDI (foreign direct investment), and will not necessarily constitute industry monopoly, and not necessarily endanger the industrial security and economic security, the key lies in how to strengthen review and supervision. There is no doubt that, under the current economic globalization, we should also use a global vision to treat foreign capital merger & acquisition, but the right attitude should be neither demonizing nor excessively looking down upon. At the very least, foreign capital merger & acquisition should reflect the principle of “cheap in price and high in quality”, and shouldn’t bargain away the enterprises; we should also set up threshold for foreign capital merger & acquisition, and should not endanger the industrial security and economic security, which is the bottom line and basic principle; we should make foreign capital merger & acquisition serve China, establish the idea of “give priority to the Chinese party”, and prevent foreign capital from treating China as a tax heaven. Of course, foreign capital is not only an economic issue, but also a political issue and a social problem, which is very complicated. In addition to establishing and perfecting the 100

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legal system environment, we ought to have a good market environment, including excellent capital market, perfect intermediary service market system, property right trading system and supervision system, and only at that time can we perfect the environment comprehensively, and promote rapid and successful implementation of foreign capital merger & acquisition. Certainly, the international flow of capital and transnational merger & acquisition is also a kind of opportunity, all we can do is seize the opportune time, draw on advantages and avoid disadvantages, and take effective use of the capital.

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Chapter Ⅵ BMW: Fight for Control Power When mentioning BMW, no one will feel unfamiliar with. BMW symbolizes money, capital and status. Particularly in China, BMW has set up a benchmark for upscale automobiles, and it owns excellent brand reputation. In 2009, under the circumstance that the global automobile industry was general stagnant, Chinese automobile industry outshined others, with an annual output of over 13 million cars; it exceeded that of the U.S.A with one stroke, and became the largest automobile market in the world. In Mainland China, BMW has also gained unprecedented growth rate, thus it acts as if it would “eat up” the Chinese market, and is intensively promoting its capital layout at present.

A. “Precious Precious”” horse leading the world automobile industry BMW is the abbreviation for Bayerische Motoren Werke. The history of BMW began in 1916 when the company was originally an aircraft engine manufacturer and still a limited liability company in 1917, then in 1918, it was renamed Bayerische Motoren Werke AG and listed on the stock exchange. In the initial phase, the company mainly devoted itself to the research & development and the production of aircraft engines. The blue and white symbol of BMW symbolizes the revolving propeller, which is exactly the portrayal of the company’s early history. In 1923, the first BMW motorcycle came out. Five years later, in 1928, BMW acquired Eisenach automobile factory and began to produce automobiles. Subsequently, BMW launched many masterpieces in the manufacturing history of automobiles into the market, which continuously stimulated strong feelings and desires of people, and cast the outstanding reputation of BMW as an automobile manufacturer. In more than 90 years, BMW has developed from a small factory to an enterprise group which is led by upscale automobiles and which produces world-renowned aircraft engines, rovers and go-anywhere vehicles, ranking the top twenty of worldwide automobile companies. (a) Global expansion BMW owns more than 20 factories and assembly plants in 12 countries of the world, and has a total of 106,000 employees. As an important member of the international automobile 102

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market, BMW is quite active, the business of which extends all over more than 120 countries in the world. At present, it is in a thriving phase: Opel and Ford Motor Company purchase six cylinders diesel engines from BMW; Rolls-Royce Group not only adopts its twelve cylinders engines and electronic equipment, but also researches on new aeroengine production together with BMW; in 1994, BMW Group acquired Rover Group; in 1998, BMW Group acquired the automobile brand of Rolls - Royce; in addition, the new factory of BMW in South Carolina of the U.S.A was completed and came into operation, which was the first foreign upscale automobile factory in the U.S.A. As the most successful and most effective manufacturer of upscale automobiles and motorcycles in the world, BMW Group has continuously created new sales record for the past several years. Influenced by the global financial and economic crisis, the sales volume of BMW Group in 2008 was not as much as that in 2007, dropping by 4.3%, and delivered 1,435,876 vehicles in total, but remained in the leading position in the global upscale automobile market. It is worth noting that in the Chinese market, BMW automobiles grew against the trend. The performance report indicated that the sales amounts of BMW and MINI brands continued to grow in 2008, with a newly high record of 65 822 vehicles, increasing by 28% on a yearly basis. In 2009 all year round, these two brands proceeded with high growth, creating a sales miracle of 90 536 vehicles, increasing by 38% on a yearly basis, excluding about 40 000 vehicles of BMW 3 series and BMW 5 series produced by BMW Brilliance Automotive. It is the foundation of success for BMW to adhere to the high-grade brand strategy. BMW Group has a total of three brands which are BMW, NINI and Rolls Royce. These three brands occupy the high-end part of each market segment from small cars to large luxury cars, making BMW Group the only automobile and motorcycle manufacturer specializing in the high-end field. At present, BMW Group has five sales territories in total, which are respectively the German market, the European market, the American market, the Asian/Pacific/African/Eastern European market, and the Greater China market. (b) Management mode and senior executives The worldwide expansion and success of BMW are bound up with its management and senior executives. In a sense, BMW is the “most Japanized” German enterprise. Besides discipline and vision, the approximately Asian humility is the prerequisite for BMW to succeed in the management layer. In addition, in BMW, there is a high level of autonomy. 103

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Differently from the American automobile Konzern which needs multiple proposals and multiple modifications before making a decision, the employees of BMW always appear with decisive suggestions, and the leading staffs only need to show their consent or otherwise. BMW’s senior executives are similar in type, which may be attributed to the career path of its manager. Many people have served as a series of different positions in different fields of the enterprise and have rich experience. For example, before the personnel director Ernst Baumann joined the board of directors, he once served as a technical officer in the South African factory, the factory manager of the Regensburg factory and the project leader of the “large and medium-sized production series”. Helmut Panke, the current German president of the head office of BMW, also has extraordinary experience. Panke was born in 1946 and is 57 years old now. After obtaining his doctor degree in Physics from Munich University, Panke experienced a research life in Swiss Nuclear Energy Institute, engaging in consultancy business in the world-famous management consulting company McKinsey, and once rendered a service to German Volkswagen. Panke joined BMW in 1982, and acted as the president and CEO of the American branch since 1993. He made important contribution to setting the production of the factory in South Carolina, U.S.A. to the right track during his tenure of office. In May 2002, Panke assumed the post of president following Joachim Milberg. In China, Eberhard Schrempf served as the present and CEO of BMW Brilliance Automotive since 2005, during the subsequent two years when he held the power of sales, the sales volume in China presented significant increase and gradually got rid of the depressed state. Alfred Rupp is 52 years old now, who joined BMW Brilliance Automotive in June 2006 and served as senor deputy president being in charge of production previously. Alfred Rupp has worked for BMW Group for nine years, and once served as senior management with respect to production in Germany and abroad.

B. Consolidating step by step while expanding in China Of the international strategy of BMW Group, China occupied a pretty important position. The products of BMW appeared in the Chinese market as early as in 1980s. The expansion of BMW in China can be divided into four steps: The first step: in April 1994, BMW Group set up a representative office in Beijing, since when BMW Group formally entered into the Chinese market. Later, BMW Group gradually 104

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expanded its business in China, and successfully set up its image of leading supplier of upscale automobile products in the Chinese market. The second step: in 2003, BMW Group entered into a brand new mileage of development in China, turning from a pure importer to a manufacturer which set up factories at home. In March 2003, BMW Group signed a joint venture contract with Brilliance China Automotive Holding Limited, and formally established BMW Brilliance Automotive in July, the manufacturing plant was located in Shenyang. Since the establishment, BMW Brilliance Automotive has developed rapidly, and has become the most beneficial weapon in BMW’s expansion in China. The third step: on November 1, 2004, BMW Group set up BMW Group Greater China region, which was an independent department for the Chinese market and responsible for the business in Mainland China, Hong Kong, Macao and Taiwan. Since then, BWM Greater China region became one of the five regional markets paralleling to the German market, the European market, the American market and the Asian/Pacific/African/Eastern European market. Christoph Stark was appointed as the president and CEO of Greater China Region, who owned the right to directly report to the board of directors of BMW and was responsible for the coordination work between the group and its joint venture in China--BMW Brilliance Automotive. The fourth step: on September 29, 2005, BMW China Automotive Trading Ltd was successfully registered. The company was headquartered in Beijing, being responsible for import, sales, marketing, service and all other related businesses of BMW and MINI brands. The establishment of BMW China Automotive Trading Ltd was a milestone for BMW Group to occupy the Chinese market. With the comprehensive development of the corporate business, Mr. Shi Kai was appointed as the president of BMW China Automotive Trading Ltd on July 1, 2006, who would report to Christoph Stark, the president and CEO of Greater China region. So far, BMW Group mainly has four agencies in China: BMW group Greater China region, BMW China Automotive Trading Ltd (hereinafter referred to as “BMW China”), BMW Group’s representative office in Beijing and the joint venture BMW Brilliance Automotive. (a) Expansion strategy In order to take root and expand the market share in China, BMW has been trying to blend 105

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its own brands into China. In order to get brand recognition from Chinese consumers, BMW can be said to have taken great pains: a. Advertising A significant proportion of BMW’s publicity funding in China has been put into advertising. The advertisements of BMW can be seen nearly everywhere, including TV advertising, Internet advertising, mobile phone advertising, print ads, finance and economics magazine ads, fashion magazine ads and culture type magazine ads, etc. BMW advertising can be seen nearly everywhere on internet, BMW renewed its contract with Baidu for the third time last year, and proceeded with its internet advertisement marketing strategy. Besides massive input and promotion to the public, BMW also tends to look for accurate target audience of it and release advertisement to its target population. BMW focuses on the advertising audience accurately, releases the advertisements to the population who can afford to buy BMWs, and at the same time slightly looses up the rules and tries to inform the future potential consumers. Meanwhile, BMW has initiated “automobile Internet movies”; it has employed famous directors and star actors/actresses, shot many short subjects which lasted about half an hour centering on all types of BMW automobiles, and uploaded them onto the internet for others to download at will. Once the internet movies were launched, the charm of famous actors/actresses and well-known automobiles were combined together, which aroused an upsurge of making a hit. Millions of consumers took the initiative to contact and communicate with BMW about automobiles on Internet, even the population who were hard to be reached. Besides, BMW has also issued thousands of DVD in order to advertise its movies. Such millions of times of contact with consumers have brought BMW with the most valuable client resources, and BMW can communicate directly with consumers through Internet. With regard to the content of advertisements, BMW flaunts on technology, innovation and outstanding performance, and repeatedly emphasizes on the pleasure in driving. b. Aiming at market and customers, and carrying out a series of market activities (a) Auto show: BMW has participated in all important international auto shows since 1994. In April 2005, BMW Group participated in Shanghai International Automobile Industry Exhibition which was directed at high specification and high standard of international large-scale exhibition with its three major brands including BMW, MINI and Rolls - Royce. (b) Trial run: since 2001, BMW Group has organized various trial runs regarding all series of 106

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automobiles over the country, so as to improve its brand affinity. c. Sponsoring public welfare (a) Introducing and holding international golf tours: since 1998, BMW introduced “BMW cup” international golf tour, the world’s largest amateur tournament, into China. The tour will hold division series in major cities and subsidize the winners to participate in the international final every year. (b) Sponsoring forums: since 2002, BMW Stiftung Herbert Quandt has launched and sponsored the European and Asian Youth Leadership Forums which are held in China, so as to promote the exchange and cooperation between youth leaders. (c) Providing vehicles specially used for VIP in international important occasions: since 2002, BMW has been providing vehicles specially used for VIPs participating in Forbes global CEO meetings in Hong Kong and Shanghai. (d) Actively carrying out social responsibility programs, including providing support for the traffic safety education to the youth and children. In 2007, BMW formally determined five fields of social public welfare activities: culture, education, environmental protection, activities of love to BMW consumers and enterprise culture construction. Meanwhile, BMW actively held events in each field so as to improve its brand influence and affinity, including “BMW Excellent Undergraduates Award Fund”, “BMW Warm Heart Library”, “BMW Children Safety Education Training Camp”, “BMW Excellent Teacher Rewarding Plan”, etc. The various activities held by BMW Group in China have effectively improved the brand awareness of BMW. Along with the increase of the demand for automobiles in China and especially the astonishing inflation in the purchasing power of the luxury cars, BMW has obtained satisfactory performance in the Chinese market. (b) A model analysis of BMW Now let’s make a SWOT analysis to each index of BMW in the Chinese market: S: strength. BMW’s strength lies in its brand image, which successfully set up high-end, long history, reliable quality and superior performance of driving and other traits. The market position of BMW in China is to design for the winners. W: weakness. As BMW pursues the high-end path, the prices of BMW products are 107

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relatively high, thus the consumer groups are limited. O: opportunity. The automobile market in China is not mature yet, this means that all the automobiles manufacturers have unlimited opportunities to promote their sales and expand their market share. This of course gives BMW the opportunity to develop in China. T: threat. There is fiercer and fiercer competition in Chinese automobile market and various automobile manufacturers from home and abroad. In the luxury car market in China, Audi has already become a leader by virtue of its sales amount as well as sales and service network, but BMW Group seems reluctant to put down its arrogant posture, declaring that its sole competitor in China is Benz which is of the same grade. (c) Carving up the luxury car market—BMW vs. Audi and Benz Since BMW entering into the Chinese market, along with the increasing demand for luxury cars, the competition among Audi, Benz and BMW is becoming fiercer and fiercer, forming a situation of tripartite confrontation in Chinese luxury automobile market. (a) Regarding the brand image, all of the brands are internationally prestigious. However, BMW seems to be superior to the other two brands due to its long history, remarkable quality and large sales amount worldwide. As the popular saying in China goes, “BMW for fun and Mercedes for pleasure”, BMW has its brand advantage over Audi. (b) Regarding the orientation of the propaganda, BMW continues its orientation abroad: it emphasizes motivation and the feeling of driving, focuses on the control performance, and BMW’s elements of sport and fashion have been accepted by numerous people. The target audience of BMW is people who have the spirit of challenge and adventure, and the humanistic spirit as well. The orientation of Audi stays unchanged for years, and it was alleged to be a luxury brand with leading technologies. On the contrary, Benz emphasizes on luxury and comfort. (c) Regarding the time of entering China, Benz was the first to enter into the Chinese market. Audi started to cooperate with FAW in assembly production as early as twenty years ago, which owned obvious advantages, so it was not surprising when there appeared a situation of Benz unifying the Chinese market. When BMW signed a contract with BMW Brilliance Automotive and attempted to enter into the Chinese market in 2001, it encountered resistance from the high price policy set by Audi, which brought BMW into such a dilemma: if BMW priced too high, it would be not easy for BMW to obtain broad market, but if priced 108

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too low, it would be detrimental to BMW’s image in China. Initially, BMW was quite conserved in its development progress in China, and too careful comparing with its rival Audi. For this reason, BMW Group also paid painful cost. In 2004, the Chinese market became the only market where BMW experienced negative growth, and the market was also considered a chicken rib which was tasteless when eaten but a pity to be thrown away. (d) Regarding the localization, Audi started localization far earlier than BMW and Benz. Localization means reduction in import taxes and all kinds of other expenses, and bringing decline to cost and selling price, which is undoubtedly conducive to the sales expansion in China. As BMW started late in China, it can’t compete with its rivals in localization rate, therefore, BMW Brilliance Automotive is comprehensively improving its localization rate in order to reduce cost at present. (e) Regarding sales and service network, BMW currently owns almost one hundred after-sale service outlets in China. Although falling behind with Audi in total amount, from the overall capacity of BMW in China, the average number of service outlets for every thousand automobiles has surpassed its main rivals. (f) Regarding comparison in sales amount. In 2004, as BMW underestimated the situation change in the Chinese market, with the over high pricing and the influence from some negative news, the sales of BMW declined, the inventory was backlogged, and China became the only market with negative growth of BMW. In 2005, BMW began to take a series of actions. First, BMW adjusted its price strategy, BMW Brilliance Automotive announced to lower the prices of all types of automobiles by 50,000 to 100,000 RMB, which was the largest decreasing amplitude among domestic cars. Meanwhile, BMW announced to extend its number of distributors to 60. In 2005, BMW succeeded in enlarging its sales amount, but such amount was still incomparable with that of Audi. In 2006, Audi launched a number of new types of cars, and the annual total sales reached astonishing 80,808 cars, with a growth rate of as high as 39%. In the meanwhile, BMW gained an increase rate of 35.4% in Greater China region (including mainland China, Hong Kong, Macao and Taiwan area), with a total sales volume of 44,700 cars, creating the largest increasing amplitude of sales amount in Asia. In Mainland China, BMW sold 36,357 cars, increasing by 51.3% on a yearly basis. In comparison, the sales of Audi in China occupied 8.93% of its global total sales; while the sales of BMW in China occupied only 2.65% of the total sales of BMW Group, showing enough space for rising and remarkable challenge. Being the largest brand of

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high-grade luxury cars, the sales of BMW in China increased by 38% in the first half of 2007, which was still less than that of Audi, the latter sold 48,718 cars in the first half of the year, 25,000 cars more than BMW. In order to increase its sales and make more profits, BMW Brilliance Automotive actively expanded its capacity in China. Benz, Audi and BMW are all luxury brands of the Nordic from Germany. As Chinese mobile market is getting increasingly mature, there are doomed to be even fiercer competition among the three bands in the Chinese market. The luxury car market of China has been almost carved up by foreign capital, but the figure of domestic luxury automobiles is hardly seen. With its advantages, BMW is preparing for another round of expansion.

ing benefit ing the power of speak C. BMW reap reaping benefitss while the Chinese party los losing BMW has an optimistic development prospect, and the joint venture strategy of BMW Brilliance Automotive has also gained effect. However, it also brings various effects to the social economy of China for BMW to invest in production in China. (a) The influence to the automobiles industry of China The entries of BMW and a series of other foreign upscale automobile enterprises into China have brought some impact to domestic automobile enterprises. The dependence of China on external automobile industry technology is as high as 80%, and even higher on external brands, thus China is called “attaching pattern automobile production country”. In order to introduce foreign investments, promote economic development, and introduce advanced technologies, some local governments set numerous preferential policies for foreign invested enterprises. For domestic automobile enterprises, in the face of market competition among powerful foreign enterprises, the only advantages of them are the low cost and the understanding of local culture. The automobile industry itself is of high technical content, thus it is rather difficult for the Chinese enterprises to stand out conspicuously in the fierce competition. In recent years, although Chinese domestic automobile enterprises have developed significantly due to the tremendous consumer market, the market share has not been expanded yet. The foreign automobile enterprises occupy as much as 70% of market share in China, and the export of independent brands is also meeting with various challenges. Chinese proprietary brands are still surrounded by crisis.

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(b) Crowding the Chinese shareholders out Through several years of cultivation, BMW Brilliance China Automotive has achieved outstanding results. However, inside this joint venture which seems to have been “normalized” and “localized”, it is not as quiet as expected. With the personnel transfers of important positions of BMW Brilliance Automotive in 2007, senior executive is hardly seen in this joint venture. With regard to the joint venture with BMW, Brilliance Auto almost let go and sat there watching the German party to operate. In 2003, the joint venture was finally set up with BMW Group occupying 50% of the shares, Brilliance Auto accounting for 40% and the government accounting for 10% of the shares, with each party holding three seats of the board of directors. In principle, BMW China was responsible for the sale of imported BMW automobiles, and BMW Brilliance Automotive for the sale of domestic BMW automobiles. Although the CEO was designated by BMW, the three seats of “senior deputy president” held by the Chinese party still had the power of speak. Just at that time, BMW Brilliance Automotive held the “learning attitude” and did not care whether it could lead in the joint venture, thus all key decisions of BMW Brilliance Automotive were made by BMW. After the establishment of the joint venture, there had been continuous rumors alleging that BMW would retake the power. At the beginning of 2007, it was said that there would be some change in the right to sell domestic BMW. On account of this rumor, the relevant principal of Greater China region indicated that, BMW Brilliance Automotive was responsible for the sale of domestic BMW, while the right to sell imported BMW would be held by BMW China Automotive Trading Ltd, although the two companies shared the same brand, they were actually separate entities, with each owning independent organization structure and different product business scopes. Regarding the handicap of BMW’s scale in China, the principal also expressed that, BMW had no intention to build the second production line up till then, “Whether to add a production line depends on the market demands, last year, we sold 28,550 domestic BMW. This year we have applied the three shifts system and the production capacity will increase from 30,000 to 41,000 cars after the work flow is optimized, which is sufficient for the market demands.” However, from the speech of the senior management, industry insiders also sensed a clue that BMW might add another production line or build another factory during its cooperation with Brilliance Auto, or even seek for another partner in China. Thus it can be seen that the reason why BMW

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chose to cooperate with Brilliance Auto was to cause the latter to help BMW sell BMW luxury cars. Although Brilliance Auto would also make a profit, the distribution ratio of profits was very unfair. During the several years after BMW entered into the Chinese market, it has always been suppressed by Audi, which seems to provide BMW with an excuse to attempt to change the situation. BMW announced in its global annual meeting that, BMW planned to manage the sale of BMW cars in China in a whole, and BMW Greater China region would hold the power of sales in entirety. This meant that the joint venture set by BMW and Brilliance Auto became a pure OEM factory. Thus, BMW began drastic power retaking actions in which Chinese shareholders were crowded out in succession. a. BMW Brilliance Automotive replaced its CEO Brilliance Auto and BMW had been appearing united outwardly but divided at heart for a long time. On the Shanghai auto exhibition in April 2007, BMW and Brilliance Auto acted independently and defiantly, adding a true footnote for the speculation about BMW “retaking the power”. It was indeed the fact, in the fourth year after BMW began to produce in China, BMW China suddenly turned to be strong, and quietly, the relationship between the joint venture partners had a sharp fission. In early 2007, taking the chance of replacing president, BMW Brilliance Automotive incidentally incorporated the power of sale to BMW Greater China region. BMW had owned power of speak in production and manufacture, within just a few months, it also incorporated the marketing promotion, brand communication, advertising and channel management into its own, completing the most important step to comprehensively control the joint venture. In March of the same year, BMW Brilliance Automotive suddenly announced that, from March 1, 2007, Alfred Rupp would take the place of Eberhard Schrempf and serve as the third President and CEO of BMW Brilliance Automotive. Regarding this surprising appointment, BMW Brilliance Automotive did not make any detailed explanation, but only expressed that the main reason for this adjustment was that the headquarters needed the former President Eberhard Schrempf for other work, but didn’t announce the explicit title. Now 52 years old, Alfred Rupp joined BMW Brilliance Automotive in June 2006, who acted as a senior vice president being responsible for production. Alfred Rupp had been worked for BMW Group for nine years, and had served in senior management positions in production in Germany and overseas. Alfred Rupp’s experience was bound up with “production”, during the eight years

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before joining BMW Brilliance Automotive, Alfred Rupp served as a deputy general manager for BMW England and a deputy general manager in BMW South Africa, both being responsible for production. On account of the rich production management experience .

of Alfred Rupp, people can’t help but guess that BMW Brilliance Automotive in the future will be more like a pure production factory. Alfred Rupp only worked in Shenyang, but the sales department and public relations department located in Beijing. In fact, BMW Brilliance Automotive’s office in Beijing and BMW Greater China region were located in the same office building. Previously, the sales of domestic BMW and imported BMW as well as the construction of distributor network were jointly assumed by BMW Greater China region and BMW Brilliance Automotive, the power of sales of BMW Brilliance Automotive was held by Eberhard Schrempf, but actually, it was BMW Greater China region that stood in the dominant position. After Eberhard Schrempf was transferred, Alfred Rupp who took over him was not good at sales, and apparently, BMW Greater China region hoped to be solely responsible for the sales of domestic BMW and imported BMW. It is worth noting that, it had been just two years since Eberhard Schrempf assumed the post of president of from BMW Brilliance in Automotive in February 2005, from many people, it was somewhat odd when Eberhard Schrempf left the position, without signing in advance nor elaborating explanation afterwards. More puzzlingly, during the two years when Eberhard Schrempf acted as President and CEO of BMW Brilliance Automotive in 2005, the sales of BMW in China appeared significant increase, with a growth rate of 52% in 2005 on a yearly basis, and more than 50% in 2006, transferring Eberhard Schrempf under such excellent performance did provide much food for thought. From the outside world, it was an explicit signal for “BMW to retake the power”. However, it was claimed by analysts that, when multinational companies adjusted their senior management, the main consideration was the adjustment in market strategy. Alfred Rupp’s promotion revealed a signal that the sales business would be incorporated into the management of BMW Greater China region. The role of BMW Brilliance Automotive would also be oriented in the production field, and while BMW accelerated the steps of synchronized sales of domestic automobiles and imported automobiles, as to the sales channels, BMW Brilliance Automotive would turn to be responsible for production and distribution of products. b. Munich conspiracy, BMW betting on the luxury car market in China With the rapid growth of China’s luxury car market, BMW Group can’t wait to perform an operation on BMW Brilliance Automotive. Between March 12 and March 17, 2007, BMW 113

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global conference was held in Munich, in which the major executives of BMW Greater China region including the President Christoph Stark attended, the main subject of the conference was the study of strategies on the Chinese market: first of all, BMW would make personnel changes in Brilliance of BMW Automotive; secondly, BMW would further optimize the production line of BMW Brilliance Automotive; besides paying attention to production management, BMW would increase its investment in the Chinese market. Michael Grenelle, a director of BMW Group, said that there was large market potential in China, and would become the largest single market of BMW in Asia. Christoph Stark also considered that there would be a rapid growth in the luxury car market in China, and the market share would rise from current 3%-4% to 6% or even more, which would be a good opportunity for BMW. In view of this, BMW would make further adjustment to the Chinese market, and transfer its focus of luxury car to China. The external cause of this was the challenge from its rivals Audi and Benz. As a result of the conference in Munich, BMW Group would conduct unified management to the sales of BMW cars in China, which meant BMW Greater China region would directly hold the power of sales while Brilliance Automotive would only act as a production factory and would not be involved in sales management. After such arrangement, BMW transferred the power of sales away from the joint venture and held it tightly in its hand. The major profit of car business lied in the sales link, thus BMW would obtain more profits and hold the initiative in hands during the next expansion. c. Incorporating the power of sales on the pretext of the “Procedures” Christoph Stark was appointed as President and CEO of BWM Greater China region since November 2004, being in charge of the newly established department. Christoph Stark was mainly stationed in Beijing and took fully responsibility of the operation of BMW Group in Greater the Chinese market, including the sales of imported automobiles, marketing and distribution, as well as the relevant coordination of the joint venture. In BMW Brilliance Automotive, the chairman of Brilliance Auto Group Qi Yumin was the first in command, while Christoph Stark was just a nominal vice chairman without the ability to exert much influence. Regarding the sales network, it was also generally managed by BMW Brilliance Automotive. Previously, transnational companies were committed to the consolidation of sales channels of imported automobiles and domestic automobiles, although BMW Group had realized synchronized sales, the power of sales was held by BMW Brilliance 114

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Automotive; therefore, both BMW Greater China region and BMW Brilliance Automotive could exert influence on the sales network. According to the annual sales statistics in 2008, the sales volumes of BMW and MINI brands in mainland China continued to grow, creating a new record of 65,822 vehicles, increasing by 28% on a yearly basis. However, the number was not worth mentioning when comparing with 119,598 vehicles of Audi. In the global market, BMW was far more famous and sold even better than Audi, but after five years upon the entry of BMW in the Chinese market when it was still no fighting match for Audi, the senior executives could not ignore the huge pressure. With the existence of Administration

of Automobile Brand Sales Implementing Procedures, the production subject should be consistent with the sales subject, thus after the business reform, BMW Brilliance Automotive would still be responsible for sales nominally, while the actual power of sales would be transferred to BMW Greater China region. In fact, after BMW obtained the power of sales, it would hold the initiative in both brand promotion and business development. Besides sales network management, it would also be even smoother in the formulation marketing strategies, the execution of marketing strategies, and even choice of distributors and training of BMW. d. Personnel adjustment After Munich BMW global conference was held in its headquarters, BMW Brilliance Automotive began its power retaking action since the last ten-day of March. After Rupp Alfred took over the post of President and CEO of BMW Brilliance Automotive in March, Daniel Kirchert, the former Business Development Director of BMW Greater China region, took over the post of Senior Vice President of BMW Brilliance Automotive in April, being responsible for sales and marketing; in May, Hans Kroeppelt who was also from Germany took charge of production and served as Senior Vice President. The whole thing was far from that simple, the Chinese party originally occupied three seats in BMW Brilliance Automotive, but so far there was only Wang Ying who was responsible for government affairs left, and whose position was demoted from “Senior Vice President” to “Vice President”. It was revealed by insiders of BMW Brilliance Automotive that, the core leadership of the company were persons who held the positions of senior vice president or above titles, in the present organization framework, the position of Senor Vice President in charge of marketing, production, finance and other work would directly report to CEO Alfred Rupp, and Wang Ying was incompetent to participate in similar meetings as a vice president in charge of government affairs. So far, the joint venture had been unworthy of the 115

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title for a long time, and the Chinese party had already been crowded out. The most direct beneficiary of Hans Kroeppelt’s new assumption was the President of BMW Brilliance Automotive Alfred Rupp, as he could be exempted from the pains of travelling between Shenyang and Beijing and directly only need to drive to the office building in Beijing Gateway Plaza. Of course, things were not that simple, because the future production business of BMW Brilliance Automotive would also be passed over to Hans Kroeppelt. In fact, this personnel adjustment of BMW Brilliance Automotive was not accidental, and this was the second Senior Vice President that BMW Group replaced in two consecutive months. Although according to the statement of BMW Brilliance Automotive, this was a normal event of personnel adjustment, people couldn’t help but fall into a reverie when BMW Brilliance Automotive made large-scale personnel adjustment of management for the first time after the establishment. After all, as a matter of routine, behind the personnel adjustment in quick succession, there would often be a power shift. When Daniel Kirchert took the office, the relevant departments of BMW Brilliance Automotive sales company were also formally incorporated into BMW Greater China region. Although BMW issued a statement regarding this, alleging: “BMW Group has neither plan nor intention to change the business scope and operation mode of BMW Brilliance Automotive as mutually agreed by the shareholders of both parties.” It is not difficult to see that, the most real intention of BMW China to make large-scale personnel adjustment was to pave its way for integrating the marketing system from the very beginning, and fully retaking the power of marketing. The most direct change that the centralization movement of power brought was the increase in its operation efficiency and its reaction speed in the Chinese market, which was what BMW had been considered as important. e. BMW Brilliance Automotive descended to an OEM factory After the power of sales was retaken by BMW, on the surface, the sales department, marketing department and other departments of BMW Brilliance Automotive involving in sales were still in operation and working independently. In fact, the rights of these departments had been rendered unfeasible by BMW, and the power of decision was also lost. As a result, BMW Greater China region held the power of sales while BMW Brilliance Automotive only acted as a production factory without participating in sales management, the only function of BMW Brilliance Automotive function was an OEM factory of BMW cars.

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In this case, it became a direct question for BMW of how to expand the capacity and extend product lines. In January 2007, the current President of BMW Brilliance Automotive Eberhard Schrempf revealed that due to the huge pressure in supply of goods, BMW Brilliance Automotive had to improve its capacity to 41,000 vehicles by optimizing the production lines. Hans Kroeppelt assumption of his duty symbolized that BMW China had basically completed the leadership regulation and incorporation action to BMW Brilliance Automotive, and there was even more obvious trace of BMW Brilliance Automotive descending to an OEM factory. f. BMW Brilliance Automotive finally lost the power of speak Facing the fact that the power of speak became unequal, Brilliance Auto seemed to behave very calmly. As an insider of BMW Brilliance Automotive expressed jokingly, the appropriate name of the company should be “BMW Brilliance”. Obviously, the decline in the power of speak owned by the Chinese party had placed Brilliance Auto in an embarrassing situation. There were various signs showing that after layer by layer penetration, BMW China had retaken almost all the actual power in its own hands, to which Brilliance Auto showed few objection. Perhaps, it was not accurate to say that the Brilliance Auto’s position in BMW Brilliance Automotive descended rapidly, rather, as an anonymous staff from BMW Brilliance Automotive mentioned, after the establishment of BMW Brilliance Automotive, almost all the major decisions were made by BMW unilaterally, from the introduction of new automobile type to the promotion and advertising manners in the Chinese market, and Brilliance Auto was just a symbol. This situation not only appeared in Brilliance Auto, in other joint ventures, it was a knowing secret that the Chinese party had lost its power of speak. The vulnerable position of Brilliance Auto in the joint venture was a dangerous yet unhealthy sign for the joint venture. Then, what on earth had the Chinese party got in such cooperation? Obviously, BMW didn’t introduce its core manufacturing technique into China, maybe Brilliance Auto had really become a factory of BMW in China for a long time. All of this showed that the BMW was quite dominant in Brilliance Auto. Or rather, BMW didn’t trust in or feel worried about letting Chinese people deal with matters concerning the BMW brand. Why did this happen? The reason was simple, in BMW Brilliance Automotive, technology, brands and quality systems were all from BMW; in contrast, the Chinese party contributed little. In addition, 117

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Brilliance Auto group was currently focusing on its independent brands, which needed help from BMW. Therefore, BMW had even more reasons to obtain more interests and power of administration in the joint venture. The essence of the struggle in power of sales was the competition for interests. For luxury brands such as BMW, the sales profit was relatively high. BMW’s goal was to reach a sale volume of 100,000 vehicles in China, when its sales profit would be very considerable. We can imagine how these profits would be distributed. BMW had always been dominant in BMW Brilliance Automotive, thus it would definitely strive for the most profits while distributing. In addition, BMW Brilliance Automotive had a lot of expenses for marketing and public relations advertising every year. It was revealed that the marketing expense budget in 2007 of BMW Brilliance Automotive was as high as 31 million Euros (equaling to about 310 million RMB), and the manner of spending this budget depended on the opinion of BMW. An insider said that the dominance position of BMW cost BMW Brilliance Automotive much money to no avail. For example, BMW Brilliance Automotive had to participate in the auto shows every year together with BMW China. Although the automobile types and areas of BMW China in the exhibition would be more than those of BMW Brilliance Automotive, the latter still had to pay half of the charge. It is not rare for enterprises like BMW holding firmly the power of sales of the joint venture. According to some automobile analysts, BMW Brilliance Automotive event represents the current situation of many other domestic automobile joint ventures. Benz, Volvo and other luxury brands are unwilling to let the joint venture be responsible for sales, and the competition for power of sales between the foreign party and the Chinese party never ends. As the foreign party owns technology, brands, capital and other advantages, although each party occupies 50% of the shares, it is always the foreign party which has absolute power of speak. There are mainly two reasons why BMW, Benz, Volvo and other luxury brands are unwilling to let the joint venture be responsible for sales. On the one hand, it is due to the interest factor, on the other hand, such enterprises treat brands as core assets, and sales itself is a process of brand promotion, so the foreign party doesn’t trust or doesn’t think Chinese people have the ability to do well in marketing these luxury brands. In this sense, when we question the foreign party’s monopoly in sales, we also hope that the joint venture 118

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themselves could improve their own ability of brand marketing, otherwise, they will descend to dependencies of transnational tycoons for ever. (c) Cultural aggression, the consciousness China youth is westernized What does BMW “invade” from us? It is no doubt the market share of our national enterprises and living space. Then by what does it “invade” from us? What makes our enterprises so terror-stricken, is it the advanced technologies, superior products or low prices? The most important factor is brands, and it is the brand images of the foreign enterprises which are dominated, distinctive, full of penetrating power and affinity that make us feel lack of power. The era of products has passed, and now it is the era of brands. Today when products of different enterprises tend to be homogenized, the competition ways of winning customers only by improving the instinct characteristics of commodities has become feeble, as it is difficult for consumers to distinguish commodities of different manufacturers from external features. In a sense, “succeeding by quality” has become history, and the difference in the brand images of enterprises is replacing that in commodities themselves as traditionally, the things that the enterprises sell are no longer commodities, but differentiated brand ideas. In the process of product sales, the decisive factor is not commodity itself, but the unique and distinct brand image of enterprise. Consumers are more willing to buy products and services of famous brands, and are willing to pay more cost. Brands sublime the products, the longer the brand lasts, the more it will accumulate, unlike products. BMW has invaded the Chinese market exactly with its brand culture, various advertisements have made Chinese people tend to the culture atmosphere it built and at the same time have begun to ignore and look down upon domestic brands, and made them consider that cars of domestic brands are not fashionable enough or bring no pleasure of driving. In addition, this is a kind of brand culture invasion, which has westernized the consciousness of youth of China. The Western party makes full use of its control in information and its influence to transmit its ideology, value judgment and cultural thoughts to the world, and perform “cultural expansion, cultural aggression”. BMW has also used its cultural value to intentionally or unintentionally instill the western culture it understand to China youth and performed cultural aggression, so as to westernize the consciousness of Chinese youth and make them advocate the West. (d) Quality and service On the one hand, BMW endeavored to promote its brand image in the name of “to do well in 119

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the service system and to improve the degree of satisfaction from consumers”; on the other hand, more and more problems in quality and service exposed, unlike what BMW had flaunted. First of all, BMW exposed a series of quality problems, which could be summarized as 11 kinds in total. For example, it occurred that the tire pressure exceeded the standard value which caused the tire to be abraded and the steel rim to be deformed, problem happened after driving just 300 kilometers, cars needed repair after just 800 kilometers, BMW automobiles appeared serious engine carbon deposit after driving for less than a month and less than 5000 kilometers, many BMW cars had abnormal sound in engines, steering wheel dithering and other problems, some BMW cars appeared invalidation in key remote control, failure in seat electric button, breakdown in airbags and brake intermittent in less than a year after they were purchased, etc. There were clients who sued against the car selling unit and the manufacturer, and argued with the manufacturer in the courtroom. As to service, there were also a lot of problems. For example, regarding cars which had quality defects, the manufacturer would only repair rather than change the cars. In maintenance costs, the 4S shops charged high, without excellent service attitude or patience, they gave the clients a sense of being toyed with, and the technicians were with common technical levels. Besides, BMW was frequently involved in a series of negative events, and the highlighted events included the event that a BMW car burst into persons, the case of fake lottery, and the event of a donkey pulled a BMW car, etc. It even occurred that three persons were burned to death in a “dual protected” BMW automobile, when the advertising slogan of BMW was spoofed to be “corrupting because of its capacity”. Although the event that a BMW car burst into persons and the case of fake lottery highlighted the attitude of the car owners and the corruption problems of some officials, it brought negative influence to the brand image of BMW. However, the event of a donkey pulling a BMW car reflected not only a problem of service, but also a problem of quality and technologies. When the public were still indulged in previous good impression of BMW, it never gave any response to the events; this was not only omission of BMW, but also disrespect to the Chinese market and Chinese consumers. (e) Be a corporate citizen BMW had a long run vision, and endeavored to be blended in the Chinese market and be an outstanding corporate citizen, so as to get favor from the public. From the senior executives of BMW, corporate social responsibility was not simple sense of charity activities, but the source for long-term development, innovation and competitiveness

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enhancement of enterprises. BMW’s corporate social responsibility programs in China mainly involved culture promotion, education support, environmental protection and enterprise culture. BMW held BMW children safety consciousness camps and traffic safety training camps for five consecutive years, carried out excellent undergraduates award fund, advocated protection of Chinese cultural heritage, took the lead to release “annual report on enterprise social contribution” in the industry, and established BMW Warm Heart foundation, etc. In addition, in foreign funded enterprises, BMW also appeared rather “magnanimous”. It developed a series of professional cooperation programs relying on German technical cooperation companies, aiming at inputting advanced ideas and technologies to the automobile industry and reserving excellent talents, so as to promote the overall development and progress of the industry. BMW launched the “mechanical-electronic integration” course which was appropriate for China’s actual conditions, provided internships for domestic students majoring in Automobile, and established positive image which was sincere and enthusiastic and ready to do charity for BMW. (f) Profit shifting The primary goal for foreign funded enterprises entering in China is to gain profits, and it is the goal of each foreign funded enterprise to transfer profits. In the Sino-foreign principal machine joint ventures and finished automobile joint ventures, the foreign party would gradually hold the power to procure raw materials and components relying on its control power in technologies. The foreign funded enterprises tended to insist on the so-called “principle of supply by the origin”, and under the excuse that domestic products were of poor quality, they would exclude the Chinese funded enterprises, reject localization of raw materials and components, and then transfer wealth by procuring from their parent countries with high prices, or receive raw materials directly from their parent companies. However, this was not the case, the product qualities of many products were not worse than those of overseas products, and were much cheaper. By the above practice, the foreign funded enterprises not only transferred substantive wealth to their parent companies, but also brought low profit rate to the joint ventures, which avoided taxes imposed by Chinese government, and caused huge loss to the finance income of our country, meanwhile seriously injured the shareholders’ interest of the Chinese party. However, behind the little or none profit of enterprises in China, there were huge profits obtained by parent enterprises

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of the foreign party. For BMW Brilliance Automotive, along with the reduction in Chinese representatives, BMW had obtained the power of production, sales and decision, as well as the power to procure raw materials and components. Although the localization rate of BMW was increasing, BMW’s absolute dominant position in BMW Brilliance Automotive made it inevitable to transfer the profit of BMW Brilliance Automotive. Besides transferring profit gained from procurement links, foreign funded enterprises also tended to collect large number of technology transfer fees from the Chinese party with their advantages in technologies, as the Chinese party was lack of technologies and had to rely on foreign capital, shareholders of the Chinese party who stood in a disadvantaged position could do nothing but accept. BMW’s expansion in China was successful. Same as other joint ventures, in this cooperation, like shareholders of the Chinese party in other joint ventures, Brilliance Auto did not escape from its fate of being crowded out, and eventually became an OEM factory, allowing itself to be trampled upon. From BMW’s pace and means of expansion, we can probably understand why it has gained success and huge profits worldwide; its success not only lies in brand and quality, but also in means.

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Chapter Ⅶ UBS: Capital War in China Speaking of Switzerland, people will think of the beautiful neutral small country in central Europe, and its developed yet controversial banking industry. UBS is a typical representative of Swiss banking industry with double characteristics. After decades of capital operation and business restructuring which are full of pathos, UBS has begun to make a figure in the financial sector in the world. Now, UBS is aiming at China where the financial industry is recently opened, attempting to stir up a new torrent of capital.

A. UBS: “stimulus-response stimulus-response”” type of development history UBS is a famous financial service enterprise, the world’s largest asset management enterprise, the biggest investment guarantee bank, and stands in the leading position in personal service, providing service for more than 4 million individuals and enterprises. For a long time, UBS has been praising itself as the leader of Swiss banking industry, valuing little of other banks, and has gradually produced a kind of arrogant attitude. When other banks constantly changed, it took no action. Thus, UBS began to lose its shares in Swiss banking industry. From later situation, the development of UBS was a typical “stimulus-response” type, apparently lacking of initiative comparing with other banks. In 1993, when Credit Suisse merged with National Bank, UBS began to realize that its position was somewhat shaken. Under the pressure, UBS completed a merger with Swiss Bank Corporation, but the simple combination of both banks didn’t bring an effect of “1+1>2”, and there was no much improvement in its business. In 1998, the bankruptcy of LTCM (Long Term Capital Management) cost UBS billions of US dollars, and UBS was forced to withdraw from many investment banking businesses. In US sub-prime mortgage crisis which influenced the whole world in 2007, problem emerged in DRCM, a hedge fund under UBS, which was forced to shut down in May, causing UBS to lose 380 million Swiss Francs (about 325 million US dollars) and become the first batch of victims in the collapsed financial market. The net loss of the whole UBS bank was as high as 4 billion Swiss Francs (about 3.4 billion US dollars), many senior executives left their offices therefore, and up to 1500 employees were dismissed. Under such heavy blow, UBS 123

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began to change a little. In the world financial market, the excellent performance of comprehensive financial groups such as HSBC and Citibank made UBS jealous, and then UBS also came up with a similar method. In 1995, UBS spent 1.39 billion US dollars to acquire Warburg Group, the largest investment company in UK. In 2001, UBS spent 12 billion US dollars to acquire Painewebber, a famous investment company in U.S.A, and gradually entered the Wall Street market. After completing this preparation work, UBS began to clean up the interior of the bank, integrating all the business departments to be UBS Wealth Management, UBS Global Asset Management and UBS Investment Bank, all of which used the brand of UBS. In the process, UBS also launched “four ones” concept worldwide, namely, “one faith, one team, one goal, one UBS”. UBS hoped to make a difference in the world with such change in organization and concept. As a result, it ranked the first in all the banks worldwide with a total asset of 196.387 trillion US dollars, according to the statistics announced by The

Banker of UK in 2007, leaving Citibank and HSBC behind. In general, UBS had unprecedented changes in the recent over 10 years. However, there was a sense of “pathos” in such changes, as it had always been blindly following the change in the world financial industry. Behind the brightness, UBS also had certain aspect which was castigated much about. The banking industry in Switzerland had been long famous for its private banking service, for UBS, it was definitely nothing difficult, being the leading bank in this aspect, UBS seized rich profits in private banking business, but note that UBS had been using its so-called confidentiality system to manage these private properties, a fairly large amount of which were “grey income”. All the time, UBS had rejected the investigation requirements of international criminal police organizations and the relevant international organizations on the excuse of “confidentiality”. As early as in the Second World War, Swiss Bank Corporation was involved in the scandal of “money laundering” for Nazi Germany. At that time, Switzerland was a major place for Nazi Germany to do gold trading and exchange for hard currency Swiss Francs. The Nazi Germany once sent millions of plundered wealth to neutral Switzerland, and made the Swiss Bank Corporation to help them launder money and convert such wealth to Swiss Francs. Swiss Bank Corporation didn’t ask about the source of the gold, but blindly earned large price difference from it. With the help of Swiss Bank, Hitler received valuable foreign 124

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exchange, thus was able to buy important materials from the world market, so as to support the war. More despicably, Swiss Bank Corporation also used the opportunity when Jews were killed by the Nazis to wantonly screw the deposits of Jews. At that time, German Jews owned more than 50000 accounts in Swiss Bank Corporation, with a total amount of over 6 billion US dollars. However, only 6 million US dollars had been handed over to Jewish organizations, while the remaining amount remained under the control of Swiss Bank Corporation. Swiss Bank Corporation always avoided talking about Jewish deposits, plus the consistent confidentiality measures of Swiss Bank Corporation, people knew little about it. However, in 1997, during a night patrol, Merry, a security guard of UBS, accidently found large amount of old files waiting to be destroyed in the basement of UBS, which included important account records in war times and deposit lists of many Jews. Having realized the seriousness of the situation, Merry passed such materials to Jews protection organizations, but he was subsequently dismissed, and had been suffering from death threat even after he escaped to U.S.A. Under the pressure of world opinion, in 2000, UBS took out 1.25 billion US dollars of illicit money as compensation fund to make up for the deposits in Swiss Bank Corporation of the victims in the massacre and to sponsor the relief work of survivals as well. Recently, UBS admitted to have exploited as many as 400 “slaves” captured by Nazis as workers for its own factory during the “Second World War”, who were basically from Auschwitz Concentration Camp. Now, UBS has become the most favorable place for criminal groups in the world, a shield for money laundering, corruption and other crimes. In November 2007, Brazilian police uncovered a major multinational money laundering crime, of which UBS was a suspect, as certain employees of UBS in Brazil were involved in the case, and many of them were arrested. This event confirmed people’s suspicion that transnational money laundering crime groups took use of UBS’s strict confidentiality system and performed money laundering and other criminal activities, meanwhile, it was also revealed that much money swarmed into UBS so as to conduct tax evasion and tax fraud activities. Under the vigorous international pressure, UBS had to take a series of measures to control the inflow of black money, and to act positively in some important international events such as freezing the personal property of Marcos, former president of Philippines. This just reflected the consistent “stimulus-response” feature of UBS.

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B. The capital control warfare in China As UBS adopted the “stimulus-response” mode for a long time, it had been behind other financial institutions, and also led the senior executives to rethink profoundly. So once UBS decided to attack actively, it would be absolutely powerful. It was similarly the scene when UBS expanded the Chinese market. This time, UBS carved out a way with investment banking and asset management businesses, and followed by private banking business, initiating its fierce attack to the Chinese market. (a) The war of annexing Chinese financial institutions Hearing the news that China joined the WTO and decided to open up the financial industry to foreign capital, UBS jumped for joy. They had realized a long time ago that after the opening up of such a premature market, the deficiency in relevant policies would definitely bring it with an excellent chance to attack. Unexpectedly, when UBS came to China, it was disappointed to find that this was not the truth. China set some restrictions on foreign capital in the sensitive financial field, which made the entry of UBS difficult, but how could UBS miss such a golden opportunity? With its experience in global operation and merger & acquisition, UBS turned to aim at Chinese financial institutions. a. The first merger & acquisition battle: controlling “UBS SDIC” In 2005, UBS concentrated its eyes on the assets management field, which had just started in China and which was a relatively open filed in the financial industry of China. UBS’s target was an asset management institution named China Fund Management Co., Ltd. China Fund Management Co., Ltd was established in 2002, jointly initiated by five security and trust organizations including Hebei Securities, Guosen Securities, Great Wall Securities, Zhejiang International & Trust Investment and Huabao Trust, and was transferred to State Development & Investment Corporation (SDIC), SDIC Power and SDIC Hongtai Trust & Investment Co., Ltd in January 2005. China Fund Management Co., Ltd was eager to introduce foreign capital so as to change the condition of company management, thus fitted in easily with UBS. UBS carried off 4% of shares held by the substantial shareholder SDIC and 45% of shares held by SDIC Power. After the completion of share transfer, the shareholders and their respective ratios of investment were: SDIC Hongtai Trust & Investment Co., Ltd holding 126

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51% of the shares, and UBS holding 49% of the shares. Subsequently, the company was renamed UBS SDIC Fund Management Co., Ltd. At that time, the upper limit of foreign capital shareholding ratio permitted by CSRC was 30%, but UBS took full advantage of its influence on the Chinese market and became the first foreign funded company to exceed the ratio limit. CSRC didn’t loosen the limit to 49% until afterwards. UBS penetrated into a fund management company and made the management layer compromise with such simple and quick methods that we can easily see its aggressiveness in entering the Chinese market. At first, UBS carried out some business with its identity, which could not be performed by foreign capital alone, so as to exert its influence on the market. b. The second merger & acquisition battle: controlling “UBS Securities” Beijing Securities, the predecessor of UBS Securities, was established at the end of 1997, merged from Beijing Securities Limited and Beijing Financial Securities Company. In 2000, after the expansion of capital and stocks, the registered capital of Beijing Securities increased to 1.515 billion RMB, and the shareholders of which were 21 organizations including Beijing State-owned Assets Management Co., Ltd and Capital Steel Head Office. According to the annual report of Beijing Securities in 2004, the net asset was 477 million RMB, the amount of operating expenses was 275 million RMB, and the deficit was 160 million RMB. Such a securities trader facing collapse needed to introduce external sources of finance so as to survive, and undoubtedly UBS would not miss such a chance. In September 2005, UBS obtained approval of restructuring Beijing Securities from the State Council. According to the restructuring scheme, UBS would invest 1.7 billion RMB to acquire 300 million shares of former Beijing Securities, and thus hold 20% of the restructured UBS Securities. On December 11, 2006, the restructured UBS Securities obtained industry and commerce license, but differently from the scheme approved in 2005, China Jianyin Investment Securities Company Ltd and Beijing Flying Country Air Service Co., Ltd invested 1 billion RMB and 490 million RMB respectively, accounting for 67% and 33% of the total capital stock of UBS Securities. Afterwards, these two companies transferred part of their shares to other shareholders. Having not exceeded 33%, the upper limit for foreign capital to hold a securities company, but UBS controlled the company at the shareholding ratio of 20%, and set up a management layer which mainly consisted of UBS staffs. CEO of UBS said, “It is a significant breakthrough with respect to mainland China securities market for UBS Group to restructure Beijing Securities.” From the statement, we 127

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can easily feel his pride. Although UBS didn’t become a controlling shareholder of UBS Securities, the industry analysts generally thought that this was just a technical operation and transitional arrangement. In fact, after a series of capital operations, with the further open-up of relevant measures by the management layer, UBS was likely to be the largest shareholder of UBS securities at last and gain absolute control over UBS securities. (b) Pursuit in China stock market After finishing the preliminary layout in the Chinese market, UBS began to influence Chinese stock market with its funds. As early as in May 2003, UBS had won the QFⅡ qualification, and then obtained an investment quota of 800 million US dollars, the most of all the QFⅡ. Owning so many funds, every act and every move of UBS began to affect Chinese stock market. Firstly, UBS earned abundant profits through stock investment. The stocks UBS invested were mostly of good performance in the Chinese market, and in its first order after it became a QFⅡ, it invested in Bao Steel, Sinotrans Air Transportation Development, Shanghai Port Container and ZTE. On the surface, these stocks were all of high turnover rates, excellent transparency of enterprise management and management layer as well as close communication and contact with foreign investors, but never ignore that these enterprises were all leaders in their respective industries, and some even held monopoly positions, such as Shandong Gold Mining and Shandong Aluminum Corporation of energy filed, Bao Steel of iron and steel field, and Shanghai Auto, Shanghai International Port (Group), Bank of China (BOC), etc. If these enterprises performed well, holding large amounts of their shares, UBS would be able to constantly absorb the stocks held by retail investors with its funds, and unconsciously and gradually become a large shareholder of the companies, and then enter into these monopoly industries which were of abundant profits. In this way, UBS would gain invaluable profits. Even if these companies performed badly, with its experience, UBS was still able to clear its inventories and leave in advance, leaving large amounts of retail investors. Remember that, institutions as UBS were to make a profit rather than consider the so-called overall benefit of the Chinese market. Secondly, UBS was well aware that, it was a common train of thought for various Chinese companies to get the chance to be listed overseas, and the opportunity to finance in overseas 128

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market, and then enter overseas market. However, in order to do this, they would need a series of help such as underwriting from international level of investment banks, so UBS naturally became a cooperation object for many Chinese enterprises. As early as in 2005, UBS had completed financial consultation, bonds projects and other programs for large-scale state-owned enterprises such as China Mobile and China Telecom, however, for ambitious UBS, the business profits therefrom could not satisfy its expansion desire. Eventually in the same year, UBS got the first substantial order of overseas IPO from a state-owned enterprise named Cosco Holdings, and gained 1.2 billion US dollars in total, from which UBS became aware of the benefits of IPO. Later, the IPO of BOC International in Hong Kong could be regarded as a typical underwriting case of UBS in recent years. As early as in August 2005, UBS was elected to be one of three underwriters for overseas issuance of BOC International. Later when BOC prepared to get listed in Hong Kong, a new record of IPO amount was created, namely, as high as 11.2 billion US dollars. Of course, the three underwriters including UBS had made indispensable contribution and obtained huge profits as well. In particular, UBS gained 16 million US dollars of profits. In addition, UBS also took use of its unique influence on the Chinese market to affect the listing of Chinese enterprises to a certain extent, so as to seek more interests. In July 2006, when “Greentown China” underwritten by UBS was listed in Hong Kong, the relevant national departments began to conduct macroeconomic regulation to the real estate industry, the issuance of Shui On Land which was planned to be listed in the corresponding period was postponed, Shimao Group managed to get listed at the lowest price with an effort, but only the shares of “Greentown China” was issued at the medium price of 8.22 Hong Kong dollars, and attracted Temasek Holdings and Warburg Pincus to subscribe the shares. This not only illustrated the better performance of the enterprise, but also illustrated that UBS was unexpectedly able to confront the measures of the regulatory authority, it was thus clear that UBS had a huge influence on the Chinese market which could not be ignored. In 2007, UBS Securities seized the underwriting order of China National Petroleum Corporation (CNPC) returning to A Stock Market. In certain sense, UBS had the opportunity to affect the listing price of CNPC, which laid a foundation for UBS to be able to gain more profits. The case of CNPC fully illustrated that many enterprises in China had trusted UBS, thus brought UBS with more profitable opportunities. (c) The culture idea propagated on a large scale 129

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For a long time, UBS had been occupying some space relying on its famous private banking business in the world, and its culture was of unique features as well. When the “four ones” concept advocated by UBS was firstly launched to the market, namely, “one faith, one team, one goal, one UBS”, it attracted enough number of people. On the contrary, Chinese financial institutions were just lack of propaganda of brand cultures. Through many middle and high-end newspapers and magazines, UBS passed its brand on to as many business people as possible by integrating marketing communications. In China, for example, in the relatively mainstream economic type weekly publication The Economic

Observer, print ads of UBS could be seen regularly. In fact, many of the audiences were of middle and high-income stratum in the society, some of who would be attracted by the private money management service of UBS, and invest more properties in UBS. On the contrary, the Chinese funded financial institutions had little brand publicity consciousness; they tended to focus on the release of products rather than the potential influence of brand promotion on the consumers. Meanwhile, UBS often released some market assessment reports relying on its strong brand.UBS’s report would consolidate the brand of UBS if it was correct; even if it was wrong, UBS could also grab a large amount of benefits from it. For example, regarding the share price of CNPC returning to A Stock Market, UBS once predicted it to be around 100 RMB, but the price of share kept slumping after it went back to the market, without any momentum to rise over 100 RMB, making the numerous investors trapped in the market constantly complain, as the gap between the expected price and the actual performance caused people’s eyebrows to raise.. In fact, after issuing similar reports, institutional investors could attract more retail investors, making the price of the stock pulled up. At the same time, they would sell the stocks they hold in large quantities at relatively high prices in the process of crystallizing public opinion. After a period of crazy time, the price of stock would go back to rational level, the bubbles would be reduced, the price would fall, and the numerous retail investors would become a mover of profit for such institutional investors, who would be trapped by the dropped share price at last. The funds owned by UBS SDIC acquired by UBS exactly took use of the UBS brand to constantly expand its market share. UBS especially emphasized on UBS SDIC’s background of foreign capital from the very beginning, making various fund holders have full of favorable impression on it. In the current Chinese market, there were a large number of fund

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holders who invested a lot of money in fund companies they trusted, hoping to earn some money from the stock market. Definitely, funds with backgrounds of foreign capital became the first choice for some fund investors, some of whom even trusted blindly in such companies and invested in such funds only. However, the fact was, these funds didn’t show profit ability they ought to have, but acted “endemically” and barely satisfactory. From this, we can easily see the power of brand culture aggression. Let’s look at an example of this aspect. UBS SDIC Core Companies Equity Fund, the core fund owned by UBS SDIC, had poor performance recently, which didn’t reflect its outstanding point even in the previous wave of bull market. The growth of this fund was always lower than its benchmark increase rate, but pretty high in risk degree. As a stock fund, its asset allocation ratio was maintained between the proposed 60% and 95%, and since its establishment on April 19, 2006, the net value of the fund rose to 2.6, but there was still certain distance between such result and its benchmark value 3.65. In general, this fund not only had common profitability, but was also inferior to the benchmark in risk, thus it performed not well in both aspects. Considering the asset allocation of the fund, the shares accounted for 77.19%, while other assets accounted for only 0.05%, the relatively high proportion of deposit and excess reserves might affect its yield rate, or maybe it was because of its bad performance that more and more people redeemed their fund, so more deposit were needed. Many fund investors began to feel disappointed at the fund, although this fund pursued long-term and stable increase in fund assets, it performed not well indeed recently. It is worth noting that this fund was completely a product of brand promotion by UBS. Although its performance was not excellent and even worse than the contemporary level of the industry, the blind trust from vast investors still promoted its performance. Just think about it, if this was a fund company purely funded by the Chinese party, possibly it had long been left without anybody caring for it. Actually, UBS utilized brand to invade the Chinese market on a large scale, as long as the promotion in the earlier phase succeeded, in the later phase, even if it didn’t perform well in certain aspects, it would bring little influence on the overall situation. It was exactly the case for the success of UBS in the world market. With such an attitude, UBS consolidated step by step and gradually implanted its culture concept and brand awareness in the Chinese market successfully. (d) Suppressing Chinese institutions

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After entering in the Chinese market, UBS began to extrude the Chinese funded market in all aspects with pretty agile motion. Upon the completion of the merger battles with UBS Securities and UBS SDIC, UBS began to contemplate kicking Chinese capital out of these two companies, so as to realize full control over these companies. With 20% of shares, UBS had already won the right of control over UBS Securities. Once UBS was able to take full control of UBS Securities, the latter would become the first securities trader fully controlled by foreign capital since Chinese securities industry was opened up. While in UBS SDIC, UBS was not satisfied with controlling 49% of the shares, but continued to try to realize greater control over the whole company by affecting the management layer. As the market was not fully open, UBS was unable to fully play its tricks. However, there was huge potential in the Chinese market. During 30 years after the reform and opening up policy was launched, a huge group enriching first was formed. It was also reported in China

Wealth Management Report released recently by an Asian research center owned by the magazine The Asian Banker that, about 250,000 rich people living in large cities of China held 18.5 billion US dollars of foreign currency circulation assets. Among them, rich people in Beijing, Shanghai, Guangzhou and Shenzhen owned 60% of the total foreign exchange savings of Chinese residents, making such cities most attracting markets for overseas private banking and wealth management companies. As a leader in wealth management, the entry of UBS could really provide the above group with better service, but it can not be ignored that UBS would also bring domestic banks with even more severe challenges. Foreign funded banks had extremely rich experience in investment and financing, asset management, financial derivatives and other aspects, and it was rather difficult for Chinese banks to contend against them. At the same time, foreign funded banks such as UBS tended to enter the Chinese financial market through radical mergers & acquisitions and moderate ways of cooperation and purchasing stocks, which brought sharply more pressure to Chinese funded banks. Regarding the investment banking business and asset management business, it already appeared a momentum of suppressing Chinese funded institutions. With its experience, UBS had won many big IPO orders. In the Chinese market, UBS unexpectedly became a leader in investment banks, really beyond people’s expectation. According to the statistics of Dealogic, a research institution of the financial industry, in the overseas IPO business of Chinese

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enterprises in 2006, UBS ranked the first with a turnover of 6.619 billion US dollars and market share of as high as 13.2%. In the ranking of underwriters in all stock capital markets in China, UBS also ranked the first with a turnover of 7.164 billion US dollars, with 445 million US dollars more than China International Capital Corporation Limited which ranked the second. Thus, Chinese funded securities companies would not be opponents of UBS in any case. It was almost the same with Chinese invested funds companies, although the funds owned by UBS SDIC performed not well at present. Once such funds got a firm foothold, they would be a serious strike to Chinese invested funds companies, and might even cause some small fund companies to lose their market share, especially when the stock market was relatively turbulent at present. It is thus clear that UBS has begun to extrude the Chinese funded market in all aspects. The Chinese funded financial organizations are facing with increasingly severe competitive situation. (e) Casting away its social responsibility in capital war The basic purpose for UBS to enter into the Chinese market was to make a profit, thus UBS would not hesitate to ignore its social responsibility for profit. After controlling UBS Securities, a series of stormy actions taken by UBS were really shocking. In the process of acquiring Beijing Securities, UBS began to show its “aggression” nature, and it was especially arbitrary when treating with former employees of Beijing Securities. When dealing with the existing business departments of Beijing Securities, UBS adopted the contracting way, preserving only 6 of the total 27 business departments. Even regarding the remaining 6 business departments, UBS also took a special way of treatment, which didn’t persuade the clients to stay but rather persuaded the clients to turn to those 21 business departments which had been sold to China Merchants Securities. In other words, UBS turned all the brokerage business resources which were previously owned by Beijing Securities to China Merchants Securities, rarely considered the feelings of the customers. After this series of measures, a multitude of Beijing Securities staffs faced with the risk of layoff or alteration in positions, and there was data showing that the former middle-level staffs of Beijing Securities were all fired, and 80% of basic-level staffs were deprecated. The reason why UBS took a fancy to such a debt-ridden enterprise as Beijing Securities was that the latter only played a role of “shell”. With such a “shell” resource, UBS was able to enter into the Chinese market further, and develop high-end business with several business 133

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departments. UBS didn’t care about the original staffs of Beijing Securities, but mainly instated staffs from UBS, which reflected the negligence from foreign capital to the rights and interests of staffs when acquiring Chinese enterprises. To a certain extent, we can say that UBS attached too much importance to its own interests and was lack of corresponding social responsibility in the process of acquisition. With respect to private banking, UBS generally focused on wealthy groups and individuals with much net capital, and provided them with individualized financial services such as property investment and management. These wealthy groups expected private banks to manage their assets, so as to get higher yield than those of normal civilians, and to preserve and increase the value of their assets. At present, in China, private banking business represented by UBS are mainly aimed at high-end customers, while totally ignoring small and medium-sized customers, this will definitely result in local inequality, and may lead to further enlargement of the gap between the rich and the poor, which is unfavorable to the current construction of a harmonious society. Even in the face of high-end customers, these foreign Banks tend to look at things through coloured spectacles and discriminate between different people, undermining the interests of some customers to a certain extent. There is another thing that could never be ignored that, the private confidentiality business of UBS will be bound to bring threat to the economic security in China. Fortunately, due to the current foreign exchange management policy of China, there is a series of restrictions on the development of private banking service of UBS which is unable to enter in the Chinese market of this field on a large scale. If UBS enters in on a large scale in a short time, its peculiar confidentiality system will inevitably bring an impact to Chinese anti-corruption work. If the private banking business of UBS is able to be developed in China, while the supervision policy of the Chinese government is not in place and the regulating means is not advanced enough, it will provide a shortcut for the greedy officials to transfer their assets. Similarly, some criminal gangs will certainly be able to imposingly transfer their funds overseas under the cover of “confidentiality” of UBS, which will damage the financial security of China. More possibly, in consideration that many countries have conducted strict regulation on activities such as anti-money laundering, of which China is still relatively lack, some crime groups will take China as a new stronghold for money laundering. As a world-class large bank, UBS have coveted the Chinese market for quite a long time. With the opening up of China’s financial industry, UBS gradually entered in China. In this

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process, UBS made full use of its rich experience and the government’s lack of relevant regulation measures, UBS obtained victories in several “battles” within just a few years. Each business of UBS from investment banking and asset management, which had been vigorously developed, to private banking regarding which UBS expected more market share has gained the most interests in merging, acquiring and restructuring and dealing with the management layer. The series of battles after UBS entered into the Chinese market were typical examples of those of various world class financial institutions. Today when Chinese capital market has not been fully opened up, UBS had started its “capital war” towards the Chinese market quietly for a long time. (f) Being suspected of being involved in fraud In 2007, CNPC returning to the A share market can be said to be a grand occasion of investment banks issuance and underwriting, but shockingly, in the competition between international capital giants and CNPC regarding the latter’s shares, UBS Group was frequently seen. It remained fresh in many investors’ memories that how terrible it was to be hung up by the shares of CNPC. Contrarily with the dismal domestic investors holding the shares of CNPC, UBS Group earned quite a lot of profits by utilizing the issuance of CNPC A stocks. Not only UBS Securities owned by UBS earned a lot of profits from the issue expenses of as high as 556 million RMB as a joint lead underwriter, but also over ten organizations solely controlled by UBS had earned a great deal by jointly lurking in the H stock market of CNPC and affecting the prices of the underlying stocks and relevant warrants of CNPC H stocks before the prospectus of CNPC A stocks was officially announced. Industry insiders pointed out that the organizations controlled by UBS should not get involved in CNPC H stocks when UBS Securities acted as a lead underwriter, as this was under suspicion of insider trading which was suspected of being involved in market manipulation. However, although the regression of red-chip stocks and the popularization of the issuance patterns of A stocks and then H stocks have made the butt joint and interaction between the mainland stock market and the Hong Kong market increasingly close, there is still a problem in regulation connection of the interaction between these two markets. As long as the related financial products don’t appear on the Hong Kong market for transaction, many exemption privileges will be given to the interest-related parties, maybe this is the basic reason why the frequent unusual fluctuations of CNPC H stocks held in UBS account 135

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when UBS Securities acted as a lead underwriter did not catch the attention of Hong Kong regulatory authority.

C. Misfortunes never come singly (a) The punishment of running a risk In 2008, UBS suffered serious troubles in two most important overseas market of it. Perhaps this will become an important time point in the development history of UBS Company. In the United States, this European “old merchant ship” was not only involved in the financial tsunami triggered by subprime mortgage, but was also badly hurt. In 2008, UBS encountered the first annual loss after the group was established. However, the prosperity of its business in China was supposed to provide this European financial giant with some support. With only excellent performance in IPO projects, UBS was able to stand firm in the first place of international investment banks’ business in China. However, as the media exposed that UBS conducted interest arbitrage through the list of CNPC A stocks, as a lead underwriter of CNPC, UBS Group had to submit a report specially to CSRC in order to prove its innocence. In addition, the event that the analysts of UBS appraised a sky-high price of China Shenhua H stocks also left the industry with a dramatic topic of conversation. The frequently happened negative news as well as back and fill movement make the market to doubt: does the cautious and solid research style of the industry still exist? Perhaps this indicates that while UBS is actively inducing employees and scrambling for orders, its traditional management culture of European banks is gradually dissipating as well. As a “risk lover”, finally, UBS got the works between 2007 and 2008. Always being known as “a risk outsider”, UBS Group unexpectedly became one of the largest payers of risk in the subprime mortgage crisis. Since the eruption of the financial crisis, although UBS has taken various measures and endeavor, it is still unable to ensure that its problems have been ended. More importantly, it is hard to estimate the damage to the reputation of the bank, especially the influence on those wealth management customers who stick to cautiousness. Perhaps, the market needs more patience and more time to inspect UBS again.

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(b) Pressure from American justice In February 2009, it could be said that misfortunes never come singly for such an industry giant in Europe as UBS. After the loss record set in 2008, the company met with another serious blow: compromising with American Ministry of Justice, UBS Group announced that it agreed to compensate the American government with 780 million US dollars and at the same time hand over part of its customer information. On account of the cooperative attitude and the remedial measures taken by UBS, American Ministry of Justice cancelled the criminal charge against UBS. In 2008, the American government brought a charge regarding UBS’ assistance in tax evasion. The U.S. regulation department alleged that, UBS was suspected of providing service for 20000 American customers who held 20 billion US dollars of asset, among which about 17000 American customers held back their identities and accounts from American Internal Revenue Service, and UBS provided help to them. Although Switzerland declared that the Swiss Bank Corporation system was still kept strictly confidential, and Switzerland would proceed with the tradition of protecting privacy of the bank accounts, UBS had already submitted more than 200 copies of customer information involved in tax evasion to the American government. Maybe for UBS Group, given sufficient time, the record of 19.7 billion CHF (16.8 billion US dollars) deficit set by the company will disappear one day, but one after another waves of scandal will be recorded in the development history of the company, and will become history debt that the company has to repay. (c) Crappy risk management Under the impact of the financial crisis, UBS Group fell heavily, which was inevitable from the angle of risk management. a. Weak internal environment factors and wrong goal setting Controlling the environment is the core of risk management and the foundation for other factors to function, which will also affect the implementation of the strategies of the company, and has something to do with the realization of the company’s goal. Regarding the risk management of UBS, there were obvious problems as follows: (a) The board of directors put too much emphasis on earnings growth, but ignored risk 137

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management. In recent years, the booming development of asset securitization has made the fixed income business way ahead of other investment banking and trading businesses of UBS. Consequently, the board of directors formulated a strategy of actively expanding the fixed income business, and entered in the subprime mortgage debt field in a high-profile way. Although they were aware that such decision significantly increased the possibility of potential loss, the board of directors still attached the most importance ongrowth rate, without clear understanding of the multiple risk and serious harm brought from the expansion of business scale. When the senior executives were informed that attention should be paid to the aggravated market, they didn’t require the relevant functional department to report comprehensively about the risk exposure regarding the assets relating to real estate of the whole group. On the other hand, the principal of the fixed income department also committed to the senior executives that such risks were controllable. The senior executives just believed such views and commitment, but conducted neither further investigation nor comprehensive market analysis. (b) The CDO business organization management structure was loose. CDO, namely, Collateralized Debt Obligation, is a kind of structured fixed income securities. The magic point of this kind of securities lies in that even mortgage debt with lower rating can be converted into securitized products through credit enhancement tools. The CDO trading scale of UBS had exceeded 1 billion US dollars, the operation mode of which was not traditional hedging or agency trade. Regarding the examination and approval of so large scale CDO products, the whole group had none unified specification and clear procedure or unified committee. It was estimated that the fixed income loss in CDO storage accounted for 16% of its total loss in the subprime crisis. (c) The internal price of capital was away from the market. The price policy of capital inside UBS Group had buried great hidden dangers for its loss in the financial crisis. According to the price policy of capital of UBS, the cost of capital obtained from the group was far less than that from the market. Meanwhile, when pricing the cost of internal financing, the price of the capital had not undergone adjustment on the liquidity of the capital business products, without distinguishing the quality of the liquidity, and laid no 138

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punitive measure to assets with poor liquidity. Therefore, low capital cost which was lack of liquidity adjustment made the trade department prone to accept lower return on investment, which would eventually lead to low efficient use of capital. (d) Lacking of effective compensation system. The compensation system of UBS made no distinction between whether the profits of traders came out of their personal ability or relatively low cost of capital. If the traders obtained excess earnings by virtue of their own level of market analysis and their ability to master information, once the judgment was inconsistent with the direction of the market, it would bring them with huge loss. Therefore, they preferred the so-called “safety trade” which meant obtaining steady profit through paying low cost of capital. Being lack of incentive measures, this kind of the compensation system made the moderate “security traders” easier to get material benefits, and encouraged the traders to do internal financing to some extent, thereby the use of the capital of the whole group became more inefficient. In addition, as the compensation assessment system of the trading department was generally linked to the current profit only, without consideration of the achievement after risk adjustment and continuous creation of future cash flow, therefore, the traders paid more attention to long-term performance of products in the market than to the short-term vested interests. b. Invalid method of risk assessment In risk management, risk assessment can be said to be the key to improve the efficiency of enterprise risk management. From the investigation of financial practice of UBS, we can find their faults in risk assessment method in at least two aspects. (a) UBS was lack of correct evaluation and judgment system and method for market trends. The trading department of UBS did not carry out fundamental analysis under deteriorate market conditions, the risk management department didn’t probe deeply into information and structure of the underlying assets of CDO, meanwhile, UBS was lack of detailed data relating to this kind of structured products. These were all shortcomings. (b) UBS was too optimistic to risk value, pressure test and other risk evaluation tools, without facing squarely at their limitations. When the trend of market reversed, the risk value and pressure test were lack of pertinence and flexibility. More importantly, when calculating these indicators, the data selected by 139

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UBS Group were mostly from the period when the economic environment was relatively good, thus the long-term risk was underestimated. c. Other factors In addition, the improperness of risk management of UBS also resulted from inappropriate control activities, poor information communication and other reasons. It was also important factors that the risk management department stood in a relatively weak position and was lack of effective monitoring mechanism.

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Chapter Ⅷ L’Oreal: The Battle of Brand Acquisition in China

The global strategy of L’Oreal is a history of brand acquisition: firstly acquire brands, then conduct cultural infiltration, and at last carry out global promotion. In China, L’Oreal can be said to have entered in a menacing manner, then how should domestic enterprises respond?

A. The way of business L’Oreal Group is a world famous cosmetics manufacturer founded in 1907. At present, all kinds of L’Oreal cosmetics sell well all around the world and enjoy great popularity. In addition to cosmetics, the group also deals in high-grade consumer goods, and engages in research of pharmacy and skin diseases. Having gone through one-hundred-year hardships and difficulties, L’Oreal has become one of the three tycoons of cosmetics in the world. (a) The establishment of the cosmetics empire L’Oreal was initiated by Eugène Schueller with 800 francs in Paris in 1908. His experience proved the importance of marketing and research & development, and indicated the future success of L’Oreal. Eugène Schueller was born in Paris in 1881. After graduating from primary school, he learned to run business as an apprentice in his family shop for a long time. His fate seemed to have been completely sketched to be a boss of a pastry shop, like his father. However, afterwards, Eugène Schueller’s fate transited suddenly. In 1891, his father went bankrupt because of financial collapse, and then the whole family moved to Iraq, where they provided pastry for Ste. Croix Middle School. This job brought Schueller with great benefit, as he was allowed to proceed with his study in such a school that was extremely strict in selecting students, where a large number of diplomats, generals and financial inspectors had been cultivated. Unfortunately, Schueller didn’t have enough time to study. At the end of that century, another misfortune forced his parents to sell the shop and they went back to their hometown in Alsace. Schueller had to act as an itinerant vendor selling cloth in the market together with his mother. However, he would like to continue his studies. In 1900, he 141

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returned to Paris, because of his love in Chemistry, he succeeded in being admitted by Paris institute of chemistry, from which he graduated in 1903. For this young chemical engineer, his new life began therefrom. Eugène Schueller was keen to chemical research, but for a long time, he was discontented with the position of teaching assistant provided by Universite de Paris. With the help of professor Oge, Schueller joined in French Central Pharmaceutical Factory in 1905, where he was responsible for hair dye research. He noticed for many times that the hair dye products made on basis of plants such as lawsonia inermis were not delicate enough, so he set about to research a kind of synthetic hair dye, the effect of which was even more natural, he named it “Ao Laiya”. Eugène Schueller promoted his new products to the hairdressers in Paris in person, which seemed to be encouraging enough for him as a result. He then set up his own organization straightforward and initiated his own business. In 1908, Eugène Schueller established French Harmless Hair Dye Company with 800 francs. Located in Al Chaleur Street, the company only rented a suite. The dining room was used as an exhibition hall and the bathroom as a laboratory. Eugène Schueller manufactured products at night and promoted sales in the daytime, the initial time was pretty difficult. However, opportunities finally came to him. In 1909, he got to know an accountant in Epernay, who was attracted by Schueller’s plan and lent Schueller 25000 francs he inherited. Later, Schueller renamed his company “L’Oreal” and moved it to a house with four rooms in Louvre Street. Then he retained the former hairdressers from Russian Palace as sales representatives of the company. Eugène Schueller even released some advertisements. Afterwards, in order to ensure that their products could be sold out, he came up with an ingenious idea of establishing professional newspaper named Paris Hairstyle. This newspaper was also a good advertising method for suppliers of other fields of the haircut industry. Since then, the sales achievement of the company kept rising. With the eruption of the First World War, Eugène Schueller was mobilized to join the war, thus he passed the right to command the company to his wife. After the “first world war” ended in 1918, his company had developed rapidly. Until 1920, the monthly volume of business reached 300 000 francs, when 10 sales representatives were employed. For Eugène Schueller, 1820s was also an era of new exploration of industry, which brought fame and wealth for Eugène Schueller. Under the requirement of the advertising customers of Paris Hairstyles, Eugène Schueller agreed to provide technical guidance to Celluloid 142

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Industrial Company, a small plastic enterprise in 1919, and greatly improved the production of the enterprise. A few years later, he merged this enterprise with General Plastic Materials Company to form French Nobel Company, and Eugène Schueller himself acted as the general manager, and expanded the business of the company to the Soviet Union. In 1925, he founded American Valentine Company, French Branch, which specialized in production of a new type of spray paint. In order to promote the products, Eugène Schueller came up with the idea of playing advertising songs in the radio. It was one of his experiences for success to value advertising all the time. In 1928, the acquisition of a soap company made L’Oreal rank among the cleaning products market with one action. Since then, L’Oreal Company launched the famous Doppler Shampoo in 1934, which was soon favored by the consumers. In 1935, L’Oreal also launched a famous kind of sun protection lotion. As of 1939, L’Oreal Group had over 1000 staffs, including over 300 sales representatives, most of who were once barbers and constantly visited the hair salons all over France. The success of the enterprise made Eugène Schueller a famous industrialist in France. After the “second world war”, the French economy recovered and developed rapidly, the living standard increased quickly, and the American way of life was rewarded and respected. L’Oreal was able to expand its product market promptly. In 1953, the newly created Coase Mayer Company became L’Oreal’s agent in the United States, whereby L’Oreal reached out to the world officially. (b) Laying out in depth and attacking in all lines The development and expansion of L’Oreal relied mainly on acquisitions. L’Oreal was familiar with the “taking-in principle”, generating synergistic effect through acquisitions, it was able to turn the advanced technologies or things into its own use, so as to improve its ability and solid the foundation for its local strategy, so that it would be able to provide smooth sales channels and dense distribution networks for its various brands of products to penetrate into the global market further. L’Oreal owned more than 500 brands all over the world, and it was its successful multiple brand management that helped L’Oreal to become the first cosmetics enterprise in the world. Most of the brands of L’Oreal were obtained from acquisitions, and we might as well look back on several important acquisitions in the history of L’Oreal as follows: 143

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a. “Maybelline New York” In 1996, L’Oreal acquired Maybelline, a low-end American beauty cosmetics company at the price of 758 million US dollars and reformed the brand. At the end of 1996, L’Oreal moved the whole management institution of Maybelline from Memphis to New York, and the new Maybelline team changed the original tedious color of the brand and launched Miami Chill, a kind of ice lemon and mint color nail polish. In former Maybelline Company, nail polish of such color scheme could never pass through the testing phase of the laboratory. In overseas markets, the word “New York” was added to the brand publicity of Maybelline, L’Oreal did not overturn the brand culture of Maybelline, but magnified the original cultural effect of the brand with the proposal of “beauty comes from heart, beauty comes from Maybelline”, and turned the image of the company from providing nail polish fancied by the middle class of the United States into producing more sexy products which were of international characteristics. Since then, the sales amount of Maybelline almost doubled from 320 million US dollars to 600 million US dollars within three years, and appeared on markets of 70 countries, the sales in markets beyond the United States reached 50% of its gross revenue. After this transaction, Maybelline grew from a local brand with limited marketing ability to a fashion brand which is appropriate for global women and all ethnic groups. b. Soft Sheen and Carson These two skin care product companies were aimed at African Americans. L’Oreal acquired them respectively in 1998 and 2000, and created Soft. Today, Soft Sheen/Carson has launched unprecedented hair care products in South Africa for a long time. At present, it accounts for 41% of shares of the market with a value of 90 million US dollars, 30% higher than the time when acquiring Carson. Of the 200 million US dollars of annual income of this brand, 30% comes from abroad, much of which comes from South Africa. c. Helena Rubinstein (HR) and Shu Uemura Before it was acquired, HR had already been a well-known high-grade cosmetics brand, but after being acquired, HR was restricted by L’Oreal. After the brand elements of HR were integrated, it obtained a great success when appearing on the market again. In November 2000, L’Oreal formed a coalition with Shu Uemura, a large-scale Japanese cosmetics company which was expanding rapidly in China and other Asian countries. 144

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L’Oreal owned 35% of the shares of Shu Uemura. After the completion of acquisition, L’Oreal conducted a localization reformation to Shu Uemura, which made the latter a well-known cosmetics company in the world at a stroke, and occupied certain space in the Chinese market and Asian market as well.

B. Taking frequent actions in the Chinese market L’Oreal seemed to be keen to acquiring domestic enterprises, which formally entered the Chinese market in 1996. In the Chinese market where was increasingly competitive, in order to avoid the trouble of being marginalized, the international cosmetics company adopted the strategy of activating local brands. L’Oreal had a clear thinking of brand, knowing that merger and acquisition was a shortcut means of obtaining brand resources, but which had no direct relevance with sales improvement. In addition, L’Oreal’s bottom line of acquisition lied not in trading prices but “the actual and potential brand values”. It was the most important to integrate local resources rapidly and realize enterprise benefit maximization. (A) The development history of L’Oreal in China In its international development process, L’Oreal was always optimistic about the Asian market, especially China which was of great potential. L’Oreal established a branch in Hong Kong in 1979, and set up China Business Department in Paris in the 1980s, so as to specialize in research of the Chinese market. In the 1990s, L’Oreal established China Business Department in its branch in Hong Kong, preparing to explore the Chinese market, and even set up L’Oreal image counters in Beijing, Shanghai and other regions in succession, so as to test Chinese consumers’ market feedbacks to L’Oreal products. In order to enter into the Chinese market, L’Oreal spent nearly 20 years to preheat and prepare. In 1996, L’Oreal formally entered the market in mainland China. It established a joint venture together with Suzhou Medical College, and conducted plant construction on the land of Suzhou Industrial Park. In the same year, L’Oreal acquired the famous Maybelline Company, and held a foundation laying ceremony and completion & commissioning ceremony respectively in Suzhou plant of Maybelline and that of L’Oreal. In February 1997, L’Oreal formally set up its headquarters of China branch in Shanghai, and established agencies in central cities such as Beijing and Guangzhou successively. L’Oreal successfully acquired Mininurse, a skin care brand for the masses of China, and Yue-Sai, a brand created by a Chinese American named Yue-Sai Ka respectively in 2003 and 2004. Afterwards, the 145

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brand structure of L’Oreal became more comprehensive in the cosmetics market in China, and the market coverage of L’Oreal became even larger. At present, L’Oreal has more than 7000 employees in China, and the business scope of L’Oreal spreads over 500 cities including Beijing, Shanghai, Guangzhou and Chengdu. The brand system of L’Oreal is just like a pyramid, impermeable to the whole link from the mass consumption to high-end consumption, each of which is supported by the corresponding brand. Of the 18 internationally famous brands owned by L’Oreal, 14 have come into the Chinese market, plus two domestic brands, the group owns a total of 16 brands in China, covering various sales channels from department stores, supermarkets, drug stores to hair salons. Within just moret than 10 years, L’Oreal has a steady rising in its position in China out of nothing, and has become a leader in the cosmetics market in China and one of the most respected transnational companies in China. The Chinese market holds the balance of L’Oreal Group in various links from research and development, production to sales etc. L’Oreal has strong production and scientific research ability, with 44 factories and 14500 employees worldwide, and it has an annual production of more than 3.4 billion. Meanwhile, L’Oreal has over 3000 R&D employees, 14 R&D centers and 13 evaluation centers around the world, contributing about 4000 brand-new high-tech formula for the cosmetics industry every year. In addition, L’Oreal also attaches great importance to the construction of quality guarantee system, and all the production bases of L’Oreal strictly adhere to the global unanimous ISO quality certification system. In addition, L’Oreal pays great attention to the construction of human resources. It values talented persons and attaches importance to each link from recruit to training, striving to combine the company culture with the employees’ personalities and specialties, and offering international career development space. L’Oreal encourages integration between different cultural background, expecting to combine the wisdom and inspiration of the employees worldwide, and hoping to promote their personal enterprises and the globalization development process of the enterprise. (B) The game for leadership in the cosmetics industry of China Mininurse: in 2001 or so, it was rumored that L’Oreal would acquire Mininurse, which even became an open secret for some time. However, such rumor gradually disappeared in the second half of 2002, when the outside world thought that such rumor would disappear just 146

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like many other acquisition rumors. Unexpectedly, on December 11, 2003, the largest cosmetics group L’Oreal suddenly announced that it had successfully acquired Mininurse; therefore, the rumor which had existed for several years in the cosmetics industry came true, just like the saying of Paolo Gasparrini, President of China region that “we have been pursuing Mininurse for four years”. It was shown from the information provided by L’Oreal that Mininurse was the third largest skin care product brand in China, which seconded only to Olay and Dabao, accounting for 5% of market share, and with a brand awareness of as high as 90%, 96% of young people younger than 20 years old knew about the brand. While it was indicated from a statistics paper issued by AC Nielsen in 2003 that, from sales volume ranking, Mininurse accounted for 3% of market share while the first accounted for 11%; from the sales amount, Mininurse ranked the fifth, with a market share of 3.1%, while L’Oreal ranked just a little higher than Mininurse, namely, the fourth with a market share of 3.3%. In the following year after Mininurse was acquired, it was integrated into Garnier, an international brand of L’Oreal in China. There even appeared counters of Mininurse in some cities, but before this, products of Mininurse were mainly sold in supermarkets. Yue-Sai: the acquisition of Yue-Sai on January 28, 2004 was even sensational than that of Mininurse, which was a comprehensive test for L’Oreal in block merger & acquisition transaction. The biggest rival participating in competition was P&G, in the key moment of scrambling for Yue-Sai with P&G, Paolo Gasparrini experienced a severe test of “fighting or continuing to wait” together with other senior executives of the headquarters. When the market trend pushed this problem to the last bottom line of decision, L’Oreal French headquarters finally made a decision rapidly. However, L’Oreal never disclosed the exact trading price. The research expenses L’Oreal spent every year was about 3% of its sales amount, and L’Oreal owned over 2500 research staffs. It was estimated by analysts that the acquisition price would be 1.5 to 2 times of the sales revenues of Yue-Sai. It was reported that the sales revenues of Yue-Sai in 2003 were 38 million Euros. If calculated according to this, the cost L’Oreal needed to pay would be more than 76 million Euros. Various information also showed that, L’Oreal seemed to be somewhat rush while acquiring Yue-Sai, without as sufficient preparation as when acquiring Mininurse. Such rapid acquisition indeed brought risk to the management and brought test to the investment management ability of L’Oreal. However, this didn’t affect the positive significance of the 147

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acquisition of Yue-Sai. From the above acquisition facts, we can see that L’Oreal is rapidly occupying the cosmetics market of China, and the local market competition has presented a trend of being led by foreign capital. Now let’s go deep into the purpose of foreign-funded enterprise acquiring local brands: to enter the Chinese market rapidly, and to become a strong brand in local market; to reduce a strong competitor, and to reduce large amount of resources consumed due to competition; to incorporate it into the global brand management system of the enterprise, and to realize brand value maximum in the global market; to take advantage of the original sales channels and sales staffs, so as to pave the way and unblock the barriers for other brands or products to be introduced to the market. The operation technique of L’Oreal is to acquire brands with competition potential or competition threat, and then entice the consumers of the brands with competition potential under its own brand by means of slow murder such as restraining and suppression. After such process, the acquired competition brands will be of little value, thus the technique of L’Oreal can be said to be a disposal with one action, and which is far from soft-hearted. In addition, in the confrontation between Chinese brands and foreign brands in the cosmetics market, domestic brands suffered from exceeding extrusion, there were only a few brands with a scale of more than 500 million RMB, including Dabao, Chongqing Olive and Shanghai Jahwa, such scale was of little competitiveness. Thus, great market space was left for foreign brands, and there appeared extensive debate about foreign brands “eliminating domestic brands”. With this respect, Paolo Gasparrini showed a very bright attitude, thinking that L’Oreal always activated new brands by mergers and acquisitions, including the last ones occurred overseas. In fact, in this acquisition, we are easy to find that it is a game between L’Oreal and P&G about the leadership in the cosmetics industry. After acquiring Yue-Sai, Mr Paolo Gasparrini delivered an open letter to all the employees of the company, without reference to which department would Yue-Sai belong or who would act as the general manager, comparing with the previous open letter after acquiring Mininurse which listed detailed department belonging and position arrangement, we can easily see how hasty L’Oreal was. (C) Detailed explanation of brand “pyramid” L’Oreal Group has a total of over 500 brands, 17 of which are international well-known brands, accounting for 94% of the gross sales of L’Oreal Group. At present, 10 brands have 148

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been introduced to China, plus Mininurse and Yue-Sai which have recently been incorporated into the group, L’Oreal owns 12 brands altogether in China. According to Pyramid Theory, the brand structure of L’Oreal in China includes high-end, middle-end and low-end parts. The spire of the pyramid: the first high-end brand is HR, which ranks the first in product quality and price among the twelve brands, the consumers of which are of relatively older ages, and of stronger consumption ability; the second brand is Lancome, one the most famous high-end cosmetics brands in the world, the consumers of which are younger than those of HR, and of certain consumption ability; the third brand is Biotherm, which aims at young fashionable consumers who are of certain consumption ability, L’Oreal hopes to shape it into a stepping stone for mass consumers to enter the high-end cosmetics field, and the price of Biotherm is also lower than HR and Lancome. They are mainly sold in high-end department stores, among which, Lancome has set up 45 counters in 22 cities, with the most market share in the present high-end cosmetics market in China, while Biotherm ranks the fourth. With respect to HR, it didn’t enter the Chinese market until October 2000, at present HR owns only six sales points in the high-grade department store in the country, and has the least selling counters. The middle of the pyramid: the middle-end brands can be divided into two parts. One of them is hairdressing products, including Kerastase and L’Oreal professional hairdressing, between which Kerastase is a high-grade brand, of higher grade than L’Oreal, and the sales channels are all hair salons and barbershops. From L’Oreal, in addition to the product itself, this sales model also provides consumers with access to professional services from technical stylists. The other part is activated health cosmetics including Vichy and La Roche-Posay, which are distributed through pharmacies. L’Oreal takes the lead to introduce the concept of selling cosmetics through pharmacies to China. The foot of the pyramid: the Chinese market is enormous and diversified, with multiple grades, and an especially large percentage with respect to the foot part. In the mass market, L’Oreal has five brands altogether at present in China. Among which, Paris L’Oreal lies in the top, which owns skin care products, make-up products, hair dyes and other products, has set up counters in over 500 department stores across the country, and sells its products in high-end supermarkets such as Carrefour and Wal-mart. Nowadays, L’Oreal has already become the first brand in high-end hair dye product in China. The following is Yue-Sai,

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which adheres to the concept of “Designed for Asian Skin Tones”, and which is also a mainstream brand, offering for sale in 800 department stores in over 240 cities across the country. The third brand is Maybelline, a popular make-up cosmetics brand from the United States, which ranks the first in the make-up cosmetics field in many countries. As to China, Maybelline has entered 600 cities, with 12000 counters. The fourth brand is Garnier, which has mainly introduced its hair dye products to China. Comparing with L’Oreal, Garnier is even more popular, and aims at young fashionable consumers, having over 5000 sales points in China. The fifth brand it Mininurse, which aims at young consumers who pursue natural beauty. The market awareness of Mininurse is as high as over 90%. It has 280,000 sales points in China, spreading all over second-tier and third-tier cities. According to statistics, the current scale of high-end cosmetics market is only about 1.5 billion RMB, merely accounting for 4% of the total scale of the cosmetics market. It is the low-end market that determines the future market division. Therefore, Paolo Gasparrini, President of China region of L’Oreal, said: “In China, the bigger market belongs to the ‘popular’ kind, thus, to be successful, the mass market is of strategic importance.” According to the framework, it is clear at a glance that the strategy of L’Oreal choosing sales channels through target customers. For example, Lancome and other products aiming at high-end customers can only be purchased in high-grade shops, while Maybelline which aims at the mass can easily be purchased from normal stores and supermarkets. The earnings of L’Oreal in China benefit from the integration of the entire chain. Treating acquisition strategy as breach, L’Oreal is constructing a complete chain of “production research and development - distribution” step by step.

C. The battle between L’Oreal and P&G In China where is full of business opportunities, certainly not only L’Oreal knows how to grasp the opportunity. As is known to all, American P&G is known for implementing multiple-brand strategy, for example, regarding shampoo, it has Head & Shoulders, Pantene, Rejoice and many other brands. However, differently from L’Oreal, the brands of P&G are divided by functions. For example, the pursuit of Head & Shoulders is to get rid of scurf, Pantene seeks to keep nutritious and moist from hair root to hair end, and Rejoice pays attention to smoothness and shine. Meanwhile, as they aim at general public, they can appear on the same shelves of supermarket, without the need to make channel subdivision. 150

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Neither P&G nor L’Oreal is willing to fall behind, thus it is inevitable for them to carry out a fierce battle regarding “beauty”. From the development trend, if L’Oreal adopts the right strategy, it is possible to fully exceed P&G and become the new leader of the cosmetic market in China. In 2004, the sales growth of L’Oreal in the Chinese market was doubled, while that of P&G in recent years was only 30%. The triple-step jump of L’Oreal is narrowing the previous “wide gap”. In addition, although the total revenues of P&G was way more than that of L’Oreal, the revenues of the latter were mostly from the cosmetics domain, while P&G still had source of revenues from the daily chemicals field, which could not stand up to L’Oreal as an equal with respect to the cosmetics field. As the jumbo of the daily chemicals industry, the cleaning product market of P&G is already mature, without large upside potential, so it has turned to the cosmetics industry which is of high profit. P&G has tasted the sweetness of the industry after only three years of fumble, with 12 billion Euros of sales amount; it is quite close to L’Oreal which is of 14 billion Euros. Meanwhile, in the cosmetics market of China, P&G has occupied more than 50% of the shares. Therefore, “Beauty Company” is promoted to be the global strategy of P&G. However, Paris L’Oreal is no pushover, and the trend of both companies striving for supremacy will be bound to be increasingly aggravated.

D. Analysis of the acquisition strategy of L’Oreal in China (A) The reason why L’Oreal acquired Chinese enterprises a. To race to control the Chinese market and realize its globalization strategy The huge cosmetics market is due to the large population base and the rapidly developing economy of China. In 2006, to total sales amount of the cosmetics market in China reached nearly 100 billion RMB, accounting for 10% of the overall global shares. The acquisitions of Mininurse and Yue-Sai quickly made L’Oreal an important member of Chinese cosmetics market, and facilitated its further expansion in the Chinese market. b. To form scale economy and lead the market During the development of L’Oreal so far, it is an important competition strategy to merge and acquire. Expanding production and operation scale is to the benefit of improving labour 151

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productivity and reducing cost. At present, L’Oreal ranks the first in the make-up cosmetics field, the second in the skin care field, and still the first in subdivided markets such as pharmacy and high-end cosmetics. c. To realize optimum distribution of resources Through acquisitions, L’Oreal cooperated with Chinese local enterprises, realizing resource sharing and win-win partnership, thus completed its strategic layout in the Chinese market with an ease. (B) The merger & acquisition modes of L’Oreal in China A. Horizontal merge & acquisition According to the industrial correlation to the merged or acquired enterprise, merge & acquisition can be divided into horizontal merge & acquisition, vertical merge & acquisition and conglomerate merge & acquisition. Horizontal merge & acquisition is a common mode, meaning merge & acquisition between enterprises which produce like products or similar products. It is Horizontal merge & acquisition for L’Oreal to complete acquisitions of Mininurse and Yue-Sai within just two months. b. Characteristics of merge & acquisition The horizontal merge & acquisition mode has distinct characteristics. First, it can reduce the investment cost, shorten the time gap between input and output; second, it can make full use of the experience curve effect, thereby it can not only get the production capacity and all kinds of assets of the acquired enterprise, but also obtain its related experience. c. Integrated type management After L’Oreal obtained the asset ownership, equity and operation control power of Mininurse and Yue-Sai, it has implemented system arrangements of the enterprise elements such as assets and personnel, causing the acquired enterprise to operate according to its acquisition objects, policies and strategies. (C) Thinking based on the acquisition strategy of L’Oreal a. Developing Chinese transnational companies, and promoting transnational mergers & 152

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acquisitions of Chinese enterprises For domestic enterprises to conduct transnational merger & acquisition, they must go through three phases including enterprise merge & acquisition inside the area, enterprise merge & acquisition across economic areas and transnational merge & acquisition outside the country. At present, there is still large strength gap between Chinese large-scale enterprises and their international competitors. Therefore, it is an urgent affair as how to promote the internationalization process of Chinese enterprises and shorten the distance with transnational companies. In order to do this, various aspects need to be promoted, including policy, law, management and talents and so on. b. Applying systematic strategic thinking, and prudently selecting merge & acquisition target The blindness of merge & acquisition is reflected in the irrationality of the merge & acquisition decisions of enterprises. We can tell from the experience of L’Oreal that during merge & acquisition, enterprises should be equipped with systematic strategic thinking and planning, rather than simply pursue superficial scale expansion. c. Attaching great importance to the integration after merge & acquisition No matter what the motivation is, the final structure and goal of merge & acquisition must meet the standard which brings increase in value. Considering the success of L’Oreal, integration is the decisive factor of whether the acquired enterprise can realize increase in value. (D) Gains and losses of L’Oreal In the past century, to a great extent, the development history of L’Oreal is a history of “acquisition and forging brands”. Then, how to measure the gains and losses of L’Oreal in its two acquisitions in China? We can say that, on the whole, these two acquisitions by L’Oreal were undoubtedly successful. Mininurse, Yue-Sai and L’Oreal obtained benefits respectively. Through joining L’Oreal, Mininurse and Yue-Sai improved their research and development levels, as well as management abilities, while L’Oreal obtained these two important brands at prices which were not high. However, there are still some people thinking that the combination between Mininurse and Garnier research center has brought about negative effect on Garnier. Many consumers 153

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expressed that, when they purchased products of Garnir, they always felt to be purchasing Mininurse at a high price. With respect to channels, the original channel strengths of L’Oreal were department stores, supermarket counter, etc, so it wished to extend the mass marketing channels which were relatively weak with the help of Mininurse. Mininurse previously owned 177 distributors, but after being acquired by L’Oreal, some distributors were lost.

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Chapter IX Toyota: Cunning Strategy in China From 1998, the strategic layouts of transnational auto tycoons in China were generally “rapid movements”. All the companies took actions decisively, they adopted their measures with facilities, including increasing capital, restructuring and setting up joint ventures. After a series of dazzling movements, the global auto tycoons have laid out every single position in China. In front of all these tycoons, people can’t help exclaiming: who on earth will lead the auto market in China in the future?

A. Toyota China: from glor gloryy to degradation In 1978, a car slogan began to be popular in China: “Where there is a way for a car, there is a Toyota.” It was the brand publicity advertisement which Japanese Toyota took the lead to present in China. With this sentence which was with a distinct sense of “eccentricity”, Toyota carved its brand in people’s minds extremely exaggeratedly. It was purported that in ten years thereafter, Toyota almost became a pronoun of car. In a blink of an eye, the annual automobile production in China has already approached ten million, and the pattern of the automobile market is even more vicissitudinary. Over the years, Toyota obtained great profits through selling imported cars and spare parts in the Chinese market, but its inertia and delay in localized production eventually made it fall behind with its rivals. In 1947, Toyota manufactured its first car. 17 years later in 1964, Toyota Crown was imported to China for the first time; in November 1998, Sichuan Toyota was established; in June 2000, Tianjin FAW Toyota Motor Co., Ltd (TFTM) was established. On August 29, 2002, before signing a comprehensive cooperation agreement with China FAW Group Corporation, although Toyota already had a history of more than 30 years, if recorded the history with chronicle of events, there would only be several events. From 1978 to 1998 when Sichuan Toyota was established, the history of Toyota in China was almost blank for twenty years.

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It was exactly this blank period that led to the increasingly decline of its influence in the Chinese market. From the time when Toyota entered the Chinese market to the earlier phase of 1990s, Toyota adhered to the principle of “only to sell cars rather than technology” in the Chinese market, which only wanted to occupy the Chinese market and to earn excess profits by importing cars, and such strategy was once very successful. From 1980s to early 1990s, imported cars were prevailing in the Chinese market. In particular, Japan stood first on the list, with an import amount of 800 000 vehicles. It was said that Toyota accounted for as high as 40% of imported cars, Crown, Corolla and Camry were continuously passed into China as high-end official cars. It was reported that Toyota sold as many as 420 000 cars in the past 20 years in China. In the business world, he who does not advance will fall backward. In the twenty years when Toyota attempted but accomplished nothing, its rivals speeded up their strategy paces in China: German Volkswagen worked along both lines, established joint ventures respectively with Shanghai Automotive Industry Corporation and FAW, which were most powerful automobile enterprises in China. At present, these two joint ventures have been able to produce the whole series of products from Santana, Jetta to Bora, Volkswagen Golf, Passat and Audi A6; American GM hadn’t entered the Chinese market until 1990s, which adopted the strategy of “entering at a high price”. It invested 1.5 billion US dollars in a lump sum at a time, the abundant capital strength guaranteed Shanghai GM to remain in a leading status in product technology from the very beginning, and Buick brand has set up an extremely firm reputation in China; in 1999, Honda began to produce Accord in China, which sold quite well all the time, and Honda gained a lot of profits therefrom. Since 1994, as China enhanced its macroeconomic regulatory, the scale of imported cars was rapidly compressed from 180 000 every year to 58 000 in 1996, and again declined to over 10 000 in 1999. Japan was the first to be affected by the contraction of import scale, whose sales volume was significantly reduced, causing “Crown” which was widely known to dejectedly quit from the Chinese market, while German branded cars which were made in China represented by Santana and Jetta rapidly occupied half of Chinese automobile market. “Flowers will die, do what you may”, although Toyota still ranks the first in the number of imported cars in China, its previous brilliance has gone forever. When the importing strategy gradually loses its efficacy, Toyota also loses its “public 156

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feeling”. In the middle of 1980s, in order to develop its car industry, China sought to set up joint ventures, and contacted Toyota first. At that time, Japanese automobile industry was soaring, and Toyota was sparing no effort to prepare for entering North America market, having no time to take China into consideration. Meanwhile, its false judgment of the Chinese market was also an important reason why Toyota was unwilling to realize localized production in China for a long time. At that moment, Toyota explicitly showed its attitude, considering that China was unqualified to produce cars, and obstinately adhered to “the entry manner of establishing the entrance of sales agent network”. In addition, in order to maintain its technology advantage position in Asia, Japan had been advocating “the wild goose type” mode, to be “the leading wild goose” in Asian car industry, and expressed that it wished to lead China for 15 years on average in technologies. As the “eldest son” of Japanese car industry, Toyota did its utmost to pursue this policy. As a result, Chinese who were wholeheartedly developing the auto industry had even less confidence in Japanese enterprises, and tended to set up joint ventures with European enterprises instead. When cars of joint venture brands came to maturity, “the auspicious days” of Toyota came to an end. Since then, cars most frequently seen in high street and back lanes of China were hung with “VW” of German Volkswagen instead of the ox-head sign of Toyota. Meanwhile, the previous readable advertising slogan of Toyota had also been forgotten for quite a long time. The pride and prejudice to the Chinese market finally made Toyota pay the price. When Volkswagen, GM and even Honda, the “younger brother” of Toyota, earned quite a lot of profits in China, the brand image of extremely arrogant Toyota turned to be unprecedentedly gloomy; the so-called principle of “only to sell cars rather than technology” it had been sticking to was even interpreted as “wishing only to gain some profits but without cooperation sincerity”, leaving Chinese car industry people and ordinary people with unhappy memories. However, pursuing for profit is the nature of merchants. In front of the temptation of huge benefits from the Chinese market, Toyota is getting unprecedentedly positive. For Toyota, there are two days they must remember: the first is August 29, 2002, on which FAW signed a comprehensive cooperation agreement with Toyota in Great Hall of the People, indicating that the role of Toyota turned from behind the scene to the front in the restructuring of 157

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Chinese car industry; another day is October 8, 2002, on which the first VIOS car produced by Toyota in the general assembly shop TFTM went off line. These two events indicated that the development strategy of Toyota in China was materially changed. This cunning snail strategy performer has finally found its power source for continuous expansion in the future.

-step jump B. The development strategy in China: “triple triple-step jump”” There was obviously a transformation “from arrogance to humility” in the attitude of Toyota to Chinese car market. In front of the outstanding performance of ten transnational car tycoons, its international rivals which were ubiquitous including Volkswagen, GM, Ford, Daimler Chrysler, Nissan, Honda, PSA Peugeot Citroen, Hyundai, Fiat and BMW, and in front of the temptation of huge benefits from the Chinese market, the strategy of Toyota in China was significantly changed. In order to adapt to the policies laid down by the Chinese government, Hiroshi Okuda put forward a development strategy of “triple-step jump” in China, who said: “China stands in a pretty important position in the future overseas undertaking of Toyota automobile company. So China is a potential market. ” The triple-step jump strategy put forward by Hiroshi Okuda was actually the first strategy transformation of Toyota in China. He considered the period from Toyota entered in China to 1990s to be the first phase, which was the running up phase for subsequent activities of Toyota; Hiroshi Okuda called the second phase as the taking-off phase, when Toyota prepared for finished automobile production beginning from spare parts production in accordance with the requirements of the car industry policies laid down by the Chinese government. Toyota mobilized the power of the group to set up over 30 joint venture factories in China. Meanwhile, Toyota acquired Daihatsu, got hold of the technology source of Tianjin Automobile Industry (Group) Co. Ltd, and provided advanced 8A motors soon, which brought Tianjin Xiali with new market vitality. In the advertisement of Xiali products, Toyota particularly told the users: the engine determined the value of a car. As an important link of its long-term development, Toyota also established Toyota Motor Technical Center China Co., Ltd in Tianjin. Hiroshi Okuda said: “We look forward to bringing the business of Toyota in China into a new phase through penetration of all the above activities and our sincere cooperation, and completing the final jump of triple-step jump as well, namely, producing finished 158

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automobiles which had been jointly developed with China in Tianjin.” After Hiroshi Okuda, former President of Toyota, put forward the development strategy of “triple-step jump” in China, the specific operation thought was gradually established: to intervene in Tianjin Automobile Industry (Group) Co. Ltd by making use of the technology cooperation between Japanese Daihatsu and Tianjin Automobile; centering around Tianjin, to establish its own spare parts production system and marketing service system; to co-fund with Tianjin Automobile so as to obtain the car project; taking Tianjin Automobile as a springboard, to watch for its chance to strive for more powerful partner (or to realize sole proprietorship); to cooperate with FAW and Guangzhou Automobile Industry Group Co., Ltd (GAIG), to form a tendency of “converging attacking from both North and South” in China, to establish its prevailing situation in the Chinese market, and to complete an important step in its globalization process. (A) Cooperation with Tianjin Automobile: obtaining the admission ticket of the Chinese market It was an expedient for Toyota to obtain the admission ticket of the Chinese market when it chose to cooperate with Tianjin Automobile. After the establishment of TFTM, Toyota began to devise how to stride over Tianjin Automobile and find more powerful Chinese partners. On March 18, 1986, Tianjin Automobile Industry Co., Ltd signed Xiali Cars License

Contract with Japanese Daihatsu Motor Co. Ltd, and began technology transfer cooperation therefrom, when Toyota held 10% of the shares of Daihatsu, knowing the project process very well. After the “triple-step jump” strategy was confirmed, Toyota increased its shareholding proportion of Daihatsu, which reached 30% in 1994, and 51.2% in 1998. Thereafter, Daihatsu became a subsidiary of Toyota, and it became well-reasoned for Toyota to intervene in Tianjin Automobile. In order to develop spare parts, from 1994 to 1996, centering on Tianjin area, each company of Toyota Group established 19 bases for joint venture production in succession, including spare parts which were vital to the basic functions of cars, such as distributors, brakes, clutches, transmissions, carburetors, engines, etc. After a series of foreshadowing, in July 2000, Toyota established a joint venture with Tianjin Xiali. At that time, it had been six years since September 1994 when Tatsuro Toyoda, current president of Toyota, explicitly expressed his wish to produce cars in China. Fujio Cho said 159

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when he knew that the joint venture plan was approved: “From Tatsuro Toyoda and Hiroshi Okuda, the relevant staffs have paid great effort, and now this most important project has been seized finally, all sorts of feelings well up in my mind.” However, the real thing that made people sign with emotion was the fortune of the Chinese partner Tianjin Automobile hereafter. Regarding the cooperation with Tianjin Automobile, Hiroshi Okuda once called a spade a spade: “We contacted no other place before talking about cooperation with Tianjin. At that time when the layout of Chinese car industry was Three Large Three Small and Three Tiny, except Tianjin, Toyota had no other choice. In addition, Tianjin had cooperation relationship with Daihatsu which was a subsidiary of Toyota.” From Toyota, Tianjin Automobile is a quasi large-scale enterprise which is only permitted to produce small size automobiles in China, not so consistent with the image and strategy of “worldwide Toyota”. Meanwhile, due to the restriction that each foreign party may only have two joint venture partners, for Toyota which always has two partners including Tianjin Automobile and Sichuan Passenger Car Factory, the next step is to contrive to stride over Tianjin Automobile and seek for more powerful partners. As to Tianjin Automobile, it once imagined that it could profit from the cooperation with Toyota, but was “badly treated” by Toyota all the time, the truth therein was self-evident. (B) Xiali 2000: a test subject of Toyota As Xiali 2000 had pure descent from Toyota, it was not allowed to be hung with the ox-head sign of Toyota. It was of profound meaning for Toyota to take this action. On the one hand, it could prevent the Toyota brand from being involved once Xiali 2000 failed, and prevent the future products from being harmed; on the other hand, Toyota could test the Chinese economy car market by Tianjin Automobile and Xiali 2000. While TFTM was established, Toyota’s plan to provide technical assistance to the transformed cars of Tianjin Automobile Xiali was also approved by the Chinese government, which was the “century square” of Xiali 2000 to be launched off assembly line on December 15, 2000. At the same time, Sail of Shanghai GM was also launched off assembly line. After just one month, Xiali led up to appear on the market, but Sail did not come into the market until four and a half months later. However, Sail has been selling well while Xiali 2000 was left with inventory shortly after it appeared on the market, and even collapsed after the 160

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setback, having very awkward market performance. Besides that the appearance was not fond of by Chinese people and the products were cumbered by the image of Xiali brand, Xiali 2000 appeared on the market in haste before a sophisticated spare part distribution system was established, which was also an important reason why it suffered a setback. Shortly after Xiali 2000 came into the market, some customers found it expensive and difficult to buy spare parts for renovation after occurrence of accidents. With respect to the Xiali 2000 project, Tianjin Automobile only had cooperation relationship with Toyota, thus, the connection between spare part supply and after-sale service was really of concern. Regarding the entirely different market performance between Sail and Xiali 2000, it was summed up as that “GM not only produces cars in China, but also carries out its advanced management concept; however, we could hardly see the essence of the management concept of Toyota from Xiali 2000”. In fact, from many people, Xiali 2000 can be regarded as the first type of Toyota car in China. As to this statement, Toyota could not wait to deny. After T-1 (which was renamed VIOS later) of Toyota was launched off assembly line, the current general manager of TFTM Hasegawa Takashi “seriously” corrected this “false understanding”. He said: “T-1 is the first type of car Toyota formally produced in China… undeniably, the technology of Toyota has been applied to the development of Xiali 2000, and the model of Toyota has been applied to the development progress of the prototype car, but it is Tianjin FAW Xiali that is responsible for the production and sales processes, thus there is no direct connection between Xiali 2000 and Toyota”. It seemed to be well-reasoned to name the first Toyota car with T-1, but it was also a little hasty, as T-1 was not an ideal name. However, the intention of Toyota could be no more obvious: to tell the whole world that this was the first car of Toyota in China. After such effect was achieved through propaganda in the early phase, the mission of T-1 was completed, and the car was officially renamed “VOIS”. Such a simple naming game was smartly taken use by Toyota to “clarify” the “purity” of its brand, and to make a clear distinction with the previous companies which “confused the public”. In market strategy, Toyota even drew a demarcation line with Tianjin Xiali, unwilling to get 161

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involved with it. “We never consider about taking use of the sales network of Tianjin FAW Xiali from the very beginning. The brand awareness of automobiles is quite important, but this time the T-1 products are hung with the sign of Toyota, which manifests it to be new products of Toyota. In order to coordinate the sales of this product, the distributor network should also be a new sales network of Toyota,” said Hasegawa Takshi. As Xiali 2000 explored the way, after appearing on the market, “VOIS” performed justifiably, giving much confidence to Toyota which firmly believed that “T-1 will come hell or high water”. However, for Tianjin Automobile, the failure of Xiali 2000 could be said to be a nightmare. Because of aging, throughout 2001, the market share of Xiali series of cars slipped down to the rock bottom since 1996, and as the product sold badly, Tianjin Automobile Industry (Group) Co. Ltd lost over 88 million RMB that year. After being merged into FAW Group, according to the announcement of FAW Xiali, there was 790 million RMB of deficit in 2002. Meanwhile, the incapability of Tianjin Automobile Group sales network, the over-staffing of personnel, the imperfectness of management etc also made Toyota quite dissatisfied with this partner. At the same time, although the Coaster project of Sichuan Toyota achieved good performance, with an annual production of 2007 in 2001 and over 3000 in 2002, it was just a commercial vehicle project, hard to be expanded, and was unable to support the strategy framework of Toyota in China. Moreover, over the years, Sichuan Toyota had only Coaster passenger car to fight for market share, having very little potential of development in the future. Thus, it had come to the time when Toyota couldn’t wait to seek for a more powerful Chinese partner. (C) The cooperation between FAW and Toyota: a game between two “eldest sons” In order to get involved with FAW Group, Toyota unexpectedly left a “joint venture license” blank, thus it began to strive for following the “North-South Volkswagen” pattern of German Volkswagen in China, and constructed “North-South Toyota”. Although Tianjin Automobile Group gradually got into trouble, it was “a fault on the right side” for Toyota.

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Zhu Yanfeng had to admit that 65 year-old Fujio Cho was superior in stratagem than him. Proficient in kendo and having read Three Kingdoms carefully over and over again, Fujio Cho was far from unfamiliar with the theory of Vertical Alliances-Horizontal Dissensions in the Chinese automobile industry. On June 14, 2002, Tianjin FAW Automobile and FAW officially signed a restructuring agreement. It was restructuring in the name, but in essence, Tianjin Automobile was acquired by FAW. The sensitive media had noticed that Akio Toyoda, the executive director of Toyota, appeared on the phase with a lofty stance. In fact, Fujio Cho had negotiated with Zhu Yanfeng about comprehensive cooperation in Beijing as early as in March. As FAW had intended to cooperate with Toyota while the latter wished to obtain the production licenses for all the automobile types, they finally used their trumps in the name of “assisting Tianjin Automobile Industry (Group) Co. Ltd”. The advantage of cooperation with FAW which acquired Tianjin Automobile Industry (Group) Co. Ltd lied in that Toyota didn’t need to switch its production base from Tianjin to any other area, but might take use of the “infrastructure” of many Japanese funded accessory manufacturers which had entered Tianjin market. And FAW got rid of its dependence on German Volkswagen whereby. Thus, for Toyota, its cooperation partner suddenly changed from Tianjin Automobile to FAW, the biggest automobile group in China. “It was perfect for Tianjin Automobile to cooperate with FAW”, the manipulator behind the scene of the largest restructuring drama in the country was Toyota. Just as the statement of a senior executive of Tianjin FAW Xiali in front of media: “Toyota considered it a condition and chip for the cooperation with Tianjin Automobile further that whether Xiali could enter FAW Group.” In August, 2002, FAW and Toyota reached an agreement regarding their joint business relationship in three fields including upper intermediate passenger cars, small size cars and upper intermediate SUV. In particular, two companies planned to produce and sell 300 000 to 400 000 automobiles a year in China before 2010. Soon afterwards, Zhu Yanfeng who set his mind on becoming an exclusive partner of Toyota went to Chengdu, and acquired Sichuan Passenger Car Factory, the Chinese partner of Sichuan Toyota, at the cost of 200 million RMB, thus completing the so-called grand ideal of comprehensive cooperation with Toyota. After the “Tianjin Automobile – FAW cooperation”, it became logical for Tianjin 163

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Automobile to cooperate with Toyota. On August 29, 2002, Toyota and FAW signed a comprehensive cooperation agreement in the Great Hall of the People, and Toyota fully entered the Chinese market thereafter. In the news conference of “FAW - Toyota cooperation”, the chief executive of FAW Group Zhu Yanfeng announced to acquire Sichuan Passenger Car Factory. It was purported that it was one of the conditions on which Toyota would set up a joint venture with FAW that FAW should incorporate Sichuan Toyota. With this move, FAW obtained space for development in both production line and region. Nevertheless, observers pointed out that in fact, the biggest winner was still Toyota, as which got the opportunity to seek for another partner in China in accordance with the industrial policy indicating that one foreign automobile company could only cooperate with up to two Chinese enterprises. However, Fujio Cho explicitly expressed through media that it would neither cooperate with Shanghai Automobile Industry Corporation nor Dongfeng Motor at present, which were another two companies of three automobile tycoons. However, the negotiation between FAW and Toyota took even longer than unexpected. Both parties didn’t officially sign a contract regarding jointly producing four types of household automobile in China until April 2003. According to the contract, both parties would produce SUV (sport utility vehicle) “Land Cruiser” and “Land Cruiser Prado” respectively in FAW Changchun Factory and Sichuan Toyota. In spring 2004, TFTM began unified assembly line production of Corolla and VOIS in the first factory; while before spring 2005, the second factory was established and began to produce Crown. In the initial phase of the contract, the annual production scale reached 10000 for Land Cruiser, 5000 for Land Cruiser Prado, 30000 for Corolla and 50000 for Crown. However, sensitive insiders found that the best-selling two kinds of automobiles, namely, Camry and Lexus, were not included in the contract. Maybe, having the straightforward character like a typical Northeaster, the young leader Zhu Yanfeng didn’t expect that Toyota which was poised to comprehensively cooperate with FAW would “act perfidiously” and seek for a new partner afterwards. According to the current policy in China, a transnational company can only set up joint venture relationships with up to two Chinese enterprises. In the past, the two Chinese enterprises of Toyota were Tianjin Automobile Group and Sichuan Passenger Car Factory, but they were acquired by FAW Group in succession. Thus, Toyota only had joint venture 164

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relationship with one Chinese company, i.e, FAW Group. After a series of transfers and dodges, Toyota not only completed its combination with the most powerful enterprise in China, but also obtained a vacant “joint venture license”. Soon, it was said that Toyota would cooperate with GAIG and produce “Camry” in Guangzhou. We have to say that FAW felt quite passive. An insider of the industry pointed out that this practice of Toyota was a violation of morality and justice to some extent, but was the smartest move for Toyota to realize its strategy in China. Certain expert even stingingly pointed out that the cooperation between FAW and Toyota was a “strategic cooperation” without capital cooperation. At bottom, Toyota just offered FAW with a few car models as the “errand fees” of cooperation. According to the material announced by Toyota and FAW, expect four types of SUV provided to FAW by Toyota, the only thing that FAW was satisfied with may be the car base to be established in Tianjin specializing in production of the Crown series. After the announcement of “FAW – Toyota cooperation”, the strategy layout of Toyota in China seemed to be quite clear: to manufacture high-end luxury cars in FAW by joint investment, to manufacture medium and lower grade of economy cars in Tianjin Automobile by joint investment, and to manufacture commercial vehicles and featured vehicles (SUV/MPV, etc) in Sichuan Toyota by joint investment. This was the most ideal strategy conception of Toyota to invest in production in China, and its strategy map attempting to dominate the Chinese market after Volkswagen as well. However, this was not all the idea of Toyota. The true thing that Toyota wanted to achieve was “the South and the North” bases, and to form a situation of “converging attacking” the Chinese market with coordination. (D) The cooperation with GAIG: constructing the “North-South” Toyota After July 2003, Toyota and Guangzhou Automobile Group preliminarily reached a joint venture agreement, under which Camry automobiles would be produced since 2005. FAW had required for Camry automobile production for multiple times but failed at last. Camry automobiles were the best selling automobiles of Toyota, which ranked the first in sales amount of the American market for five times in the past six years, the only lose was to 165

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Accord of Japanese Honda in 2001. As is known to all, Accord which cooperated with GAIG had brought Honda with unexpectedly huge profits. Camry automobile produced in China was definitely an ideal choice for Toyota, but FAW was unable to have a finger in the pie. GAIG was undoubtedly the best choice. It lied beyond the three automobile tycoons, so it wouldn’t go so far as to enrage FAW while being able to contain its old rival Honda. Meanwhile, after years of cooperation with Honda, GAIG had cultivated a batch of local talents who were familiar with the operation of Japanese enterprises. As a condition, it was likely for Toyota to consent FAW’s wish to participate in the new joint venture. “It was Toyota that required FAW to acquire the Chinese shares of Sichuan Toyota, if FAW could have been smarter, it would not have acquired Sichuan Toyota, and Toyota would not obtain the Guangzhou project.” Considered a car analyst who declined to be identified, “The actual competition situation of China didn’t allow Toyota to stop its cooperation with FAW, but FAW didn’t think that much, and mistakenly thought it had hit the jackpot.” So far, Toyota owned production bases in Changchun, Tianjin, Chengdu and Guangzhou of China. Just as an industry insider who had dealt with Toyota for a long time said: “Our strategy is taking one step and looking around before taking another, however, for Toyota, it was looking around and taking one step before looking around another.” Toyota “Camry” exported the most models to China. For Toyota, in the intermediate automobile filed where was the main battlefield in the Chinese market, there was none product being able to compete with the “Camry” model. By virtue of the demonstration effect of the single model “Accord” which obtained huge profits in the Chinese market, Guangzhou Honda procured Toyota to have extremely highly expected value in “Camry”. Choosing Guangzhou, Honda was not only able to share resources with Honda and Nissan, reduce the cost, form a cluster advantage of Japanese cars, but also able to follow the “North-South Volkswagen” layout of Volkswagen in China, and construct “North-South Toyota”, so as to catch up with its rivals in the Chinese market as soon as possible.

C. Controlling the network There is a sentence prevailing in the Japanese automobile industry, saying that Honda is good at technology while Toyota is good at marketing. In November 2003, FAW Toyota Motor Sales Co., Ltd was about to open business formally 166

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in Beijing Kerry Center. Afterwards, all the cooperation automobile models between FAW and Toyota would be included in the marketing system of this joint venture marketing company. In addition, although owning only 49% of the shares, Toyota had in fact mastered the dominant right of the joint venture, and obtained the “brand new sales network” it yearned for quite a long time (said Hattori Etsuo). As early as in 1980s, by taking advantage of Toyota Motor China which was established in Hong Kong (hereinafter referred to as TMCL), Toyota had preliminarily established the network and service stations for selling imported Toyota cars through the “notification system”. After China participated in WTO, joint venture was permitted in the automobile distribution field since 2002, but foreign party which owned more than 30 chain stores could not hold the controlling stake of the joint venture. At the end of 2002, TFTM VOIS was launched off assembly line, TFTM itself should be responsible for sales, but Toyota ordered Toyota Motor China Investment (hereinafter referred to as TMCI) it established in Tianjin in July 2001 to solicit such business. Now that a joint venture sales company was set up together with FAW, and all the channels including the sales network of TMCL had been incorporated, Toyota could be said to have basically completed its strategy arrangement in sales channels so far. Regarding the new joint venture sales company, the chairman was from the Chinese party, while the general manager was from the Japanese party, and two of the three deputy general managers were from the Chinese party. Nominally, the economic management committee consisting of the general manager and deputy general managers would be responsible for daily business operations of the sales company, which structure would be changed every four years. On the surface, everything seemed normal. However, the negotiation result was almost the same as all the joint ventures cooperating with Toyota in the world: the general manager from the Japanese party had the terminal adjudicative power, which was actually the general manager responsibility system. The affairs of the joint venture would be determined by the Chinese Department in the headquarters in Japan of Toyota other than the board of directors of the joint venture. It was understood that, in the future, FAW Toyota Motor Sales Co., Ltd would be comprised of staffs from current TMCI and FAW. Originally, TMCI had only 80 staffs, but recruited another 120 all of a sudden afterwards. FAW didn’t participate in the recruitment of these 167

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120 staffs, but if FAW intended to appoint any staff into FAW Toyota Motor Sales Co., Ltd, Toyota would require assessment by itself. In the cooperation negation with FAW, Toyota did its utmost to highlight its own image. This had been shown in the VIOS produced by TFTM. All the automobiles produced by joint ventures would be hung with the logo of the Chinese party, but there was no word like “Tianjin” or “FAW” on VIOS. The new joint venture sales company would also use the logo of Toyota only, which meant that FAW would not appear on any signboard of all the outlets of FAW Toyota. This kind of thing never happened in previous joint ventures of FAW. For example, when FAW cooperated with Volkswagen, the names of FAW and Volkswagen would be paratactic listed on all the advertisements, name cards, letters and outlets of the co-operative corporation. “Because the trump card of Toyota is: if the opposite party disagrees, it will sell more imported Toyota automobiles. After all, Japan is quite close to China.” expressed Tang Tao, an independent automobile analyst, “Thus, Toyota is able to perform completely with ease in the Chinese automobile market.”

D. The piggybacking strategy: Toyota hasn hasn’’t finished its layout yet At present, there are two most crucial issues for Toyota in China: to strengthen its brand strategy and to establish a characteristic sales system of Toyota. However, the ultimate goal of Toyota lies in investment. Once permitted by policies, depending on the huge spare parts supply and sales service system it has established step by step, Toyota may cast aside any of its Chinese joint venture partners at any time. It is said that the recent series of actions of Toyota has made Volkswagen, GM and other rivals of Toyota feel “dreadful”. This verifies the statement of Zhang Xiaoyu, Vice President of China Machinery Industry Federation: “Once Toyota officially invests in production in China, all the other automobile companies around the world will feel nervous, when can be regarded as the approach of the real competition phase among the worldwide automobile enterprises in the Chinese market. Because the enterprise culture, management, marketing, spare parts, product development of Toyota and the characteristic of its products being suitable for Asian and Chinese people are obvious to all.” Fujio Cho, President of Toyota, once expressed that Toyota would occupy 10% of the shares 168

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in the Chinese automobile market in 2010. The reason Fujio Cho gave at that time was that, the conservative annual sales volume of passenger cars in the Chinese automobile market would be 4 million vehicles, thus it shouldn’t be difficult for Toyota to contribute 400 000. We should say that 10% is just a bottom figure for Toyota, but comparing with 20% of market share alleged by Korean Hyundai, this expected goal provided by Toyota would hardly raise any suspect. But now, the Chinese automobile market grows so fast that any estimate seems to be conservative. It is logical for Volkswagen and GM to be “dreadful” about Toyota. Toyota has been conspiring for the Chinese market for as long as 30 years, although it lags far behind in finished automobile production, the huge marketing, service and spare parts supply network it established step by step is the most dreadful part. Statistics show that Toyota has elaborately built up a nationwide large sales and service network. Toyota even cost as much as 50 billion Yen to incorporate almost all the aspects of automobile production, spreading over Northeast, North China, Central China, South China, Southwest and Northwest of China. Toyota considered it “the key to succeed” in China to “strengthen the brand strategy and to establish a unique sales system of Toyota”. Due to the lag of localized production, comparing with Volkswagen, GM, Honda and other competitors of Toyota which invested and constructed factories in China much earlier, Toyota has relatively low level of brand awareness in China. In fact, inside Toyota, there were many people worrying about “whether Toyota could be sold or not in China”. “While the Chinese automobile market gradually turned from the seller to the buyer, the sales link has become a more and more crucial factor for the success of enterprise.” Cheng Meiwei, President of Ford China once analyzed, but this seemed to be an advantage of Toyota. On October 28, 2003, FAW and Toyota established a joint venture named “FAW Toyota Motor Sales Co., Ltd”, which intended to operate “Coaster”, “VOIS”, “Crown”, “Land Cruiser”, “Corolla” and “Dario Terios” jointly produced by FAW and Toyota. In addition, this company would also operate automobile spare parts and related products of the abovementioned brands, and provide after-sale service for the users. As of November when the company officially started business, FAW Toyota Motor Sales Co., Ltd had established 68 distribution shops in China. 169

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Although important movements had been frequently taken, Toyota had not finished its layout yet, and seemed to be more interested in “sole proprietorship”. By virtue of the large network it established in China, once policies permitted, Toyota could cast aside any of its partners at any time. “It is obvious that Toyota uses the piggybacking strategy in China, which has first taken use of Daihatsu, then Tianjin Automobile, and now it turns to FAW and GAIG, but the ultimate goal of Toyota is to act on its own.” A person in charge of Toyota once said: “If Toyota succeeds in the Chinese market, it will mean that Toyota has finished its most crucial step to realize globalization. Our goal is to become the No.1 in the Chinese market.” However, in order to realize such goal, Toyota still has a long way to go.

E. Controversy regarding Toyota (A) Neglecting Chinese consumers As an enterprise, the quality of its product is the key to its degree of success. Maybe you would say that as a transnational enterprise, the product quality of Toyota is beyond question, however, some recent reports were indeed aimed at several new types of cars released in China by Toyota. First came Camry, which can be said to have stolen all the show since its being released in June 2006, within just two months, it was ranked the third in the list of intermediate automobiles. However, the consequent news could not be regarded as an advantage; firstly the ABS screw of Camry was installed conversely, and Camry cars were recessively recalled by Guangzhou Toyota; then the Camry traffic accident case occurred, in which the direct rumple of the engine lead to death of the passengers. Secondly, it turned to be Reiz, regarding which FAW Toyota publicly acknowledged that there was some quality problem in Ruiz, and undertook to overhaul the automobiles and extend the guarantee period as well. Afterwards, FAW Toyota recalled 20 000 Crown cars in the country, as the outboard adhesive tape of some front windscreen was of so weak inosculating ability that it tended to fall off, and in special cases the fallen adhesive tapes might cause accidents or harm to the subsequent vehicles and pedestrians. Thus, Toyota cars fell into another quality crisis in China. From the domestic situation, Toyota experienced the baptism of the Oil Spilling Event,

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which not only messed up the influence of collision before the event, but also affected the image of Camry. The name of Camry was with some defect in itself, as the name Camry (佳 美) was kidnapped by others, Guangzhou Toyota renamed it Camry (凯美瑞). After Camry was launched, it experienced a good sales, and ranked among the top three within just two months, but unfortunately, its workmanship was so rough that a problem of ABS screw broke out before 20 000 automobiles were sold. If the quality problem accompanied in the expansion is not precluded, we can predict that the future of Toyota will be gloomy. However, for Toyota, there is not only the problem of quality that is affecting its credibility, for Chinese who are extremely sensitive to price, the existence of the price difference never fail to affect the sensitive nerves of the consumers: taking Highlander imported by the Guangzhou shop for an example, the selling price ranges of four automobile models are between 379,800 RMB and 469,800 RMB. However, it is said that the selling prices of Highlanders which appear on the market synchronically in North America market are not always consistent with those in North America. It is reported that Highlander 2007 is sold between only 24,480 and 34,610 US dollars in North America, equaling to about 200,000 to 280,000 RMB. “Highlander belongs to imported automobile model in both China and America, and I have inquired the relevant departments regarding the selling price in America, but have got no clear answer yet.” said Niu Yu. The automobile expert Jia Xinguang considered that the prices of imported automobiles stayed high due to the numerous and high import taxes and fees in China. However, there are also Camry cars with high price but low configuration. It is shown in the information released by the online car market that, comparing with the Taiwan version, Camry 200 G which is sold at 219,800 RMB in Guangzhou is sold at 809,000 Taiwan dollars, equivalent to 202,000 RMB. In configuration, comparing with the Taiwan version, the Guangzhou Toyota version of this model is equipped with a power-driven skylight, but no traction control system, vehicle stability control system, parking sensor or intelligent mobile communication system. The power assembly is almost the same except for the size. The industry insiders consider that the same model is sold at different prices in different areas, or even sold at a raised price in the Chinese market where the price is already high, whereas the quality of the product is not as good as that in low price areas, thus the interests of the consumers are impaired.

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(B) Overlooking the Chinese employees The attitude of Toyota seemed to be putting the consumers in the first place all the time, as consumers were the source of interest. However, the employees were completely different from consumers from the point of view of Toyota. As a member of Japanese enterprises in China, Toyota also had the common problem: the wages of Chinese employees were significantly lower; in general, the wages of ordinary employees were 80% of those in European and American enterprises, while the wages of department principals were equivalent to half of those in European and American enterprises. Meanwhile, the dismissal rate of Chinese employees in Japanese enterprises was 24.5%, in which the active dismissal rate was 2.7 times of the passive one; the dismissal rate in European and American enterprises was only 18.8%, and the active dismissal rate was 1.06 times of the passive one. “Reduce the factor of human to the minimum.” A Chinese employee in a Japanese enterprise who located in Shanghai blurted out when talking about his impression of Japanese enterprises. Indeed, you can get a rough idea about Toyota ignoring Chinese employees. Do you still remember the advertisement event once happened when two automobile advertisements of Totyota aroused much echoes. One of which was a “Toyota Prado” advertisement published in the magazine Auto Fan: a Pardo automobile parking before two stone lions, one of which put up its right claw as saluting, while the other looking downwards, the background was high buildings and large mansions, and the corresponding advertisement message was “Pardo, you have to respect”; the other advertisement was a “Toyota Land Cruiser” advertisement: a Land Cruiser dragging a large green local truck with high wires on a snow plateau, the filming site was in Hoh Xil. “This is obviously humiliating China!” a netter left such words. Firstly, regarding the stone lion saluting and bowing towards “Prado”, many netters considered that the stone lion symbolized China, but the “Toyota Prado” went so far as to make it “bow” and “salute” to an automobile of Japanese brand. “Especially when considering the relationship among the Lugou Bridge, stone lion and anti-Japanese, it is more resenting.” Regarding the “Toyota Land Cruiser” advertisement in which a truck was dragged, many people considered that, the truck in the picture was a domestic Dongfeng automobile, and “the green Dongfeng automobile looks much like the military vehicles of our country.” Therefore, various people delivered their opinions, thinking that the above two 172

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advertisements of Toyota had hurt the feeling of Chinese and humiliated the self-esteem of Chinese people. Putting aside the “making a fuss” problem for the time being, if a transnational enterprise does not learn about the culture of a country and causes time after time of misunderstanding, how can it make its employees feel relieved to work in this country and make its consumers in this country feel assured to consume?

F. Having to mention: the “recalling event event”” of Toyota (B) Review of “Toyota recalling event” The snowslide type of recalling by Toyota first appeared in the United States, in just a few months, the accelerator pedal, the driver seat foot pad, the brake and other components of Toyota were successively reported to have defects, and a total of over 10 million cars in multiple “recalling events” brought Toyota with unprecedented pressure and crisis, and made it feel breathless: huge financial losses appeared, the consumers began to lose their confidence in Toyota, the production mode and the development philosophy encountered queries...... In March 2010, the global influence of “Toyota recalling event” kept upgrading: due to the problem of the power steering system, the mainstream automobile type Corolla was under strict supervision of American supervision departments; when Akio Toyoda, President of Toyota, attended the hearing regarding the problems of Toyota, tears dropped with his voice. Faced with the crisis, Toyota denied at first, and then attempted first to make its mistakes sound less serious and then to reduce them to nothing at all, but made every possible excuse at last. Such negative performance of the company would definitely get no support from its consumers worldwide. (B) What happened on earth to Toyota? As the “recalling event” got increasingly fierce, the public could not help but ask: what happened on earth to Toyota? Two years ago, it was the model of the automobile industry and every move of Toyota that were revered, the “Toyota mode” was marvelous; but now Toyota became the object to which many people disgusted, and it became a mainstream to criticize Toyota. Carefully reviewing and analyzing the Toyota event, it is not hard to find the following reasons: a. Congenital defect in design 173

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There were some congenital defects in the design of Toyota finished automobiles, having not experienced strict actual road test, huge hidden danger was buried. The Toyota event indicated that safety defect has become not only a problem existing in Toyota automobiles produced in the United States, but also a common problem. b. Worship in cost control, parts modularization leading to huge recalling losses When Katsuaki Watanabe, the previous President of Toyota, was in office, he advocated large-scale of production expansion and modularized production so as to reduce the cost. As a direct result of such strategy, when a kind of failure occurred in one type of component, multiple types of automobiles would need to be recalled, even some automobile types produced by different enterprises employing the same supplier were involved. Crazily cost reducing had become a common problem for global car manufacturing enterprises, particularly Toyota. c. Absence of crisis management Toyota had so poor ability of crisis public relation settlement that it could only passively wait for negative news to be exposed by the media continuously, and which only had single coping strategy. From the beginning of the “recalling event”, Toyota lagged in response, acted dilatorily, paid no attention to the communication with the public and ignored the interests of the consumers. All of these indicated that, as an old and famous transnational enterprise, Toyota had seriously lagged ability of crisis warning and crisis management, which was pretty ill-matched to its identity and status. d. Too rapid expansion and deviated development strategy The ten years in the new century of Toyota could be said to be ten years for rapid expansion. Since 2008, Toyota ranked the first in sales amount for two successive years in 2008 and 2009, exceeding American GM. Just because of this, there appeared certain gap in the overlong industry chain management while expanding, which led to the phenomenon of “a small leak sinking a great ship”. In order to deal with the financial deficit, the Toyota Empire risked its life to cut the cost, which made signs of danger appear in every link. Toyota blindly “sprawled” to the extent that the management was seriously lagged. Therefore, Toyota lost its balance among product quality, industry scale and operating conditions. e. Toyota becoming a sacrifice of American political and trade protection

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Under the background of sweeping financial crisis in the world, on account of its own industry interest, the United States strengthened its supervision over Toyota. In fact, GM, Ford and other American native car companies became the biggest beneficiaries of the “recalling event”. According to the statistics, after the recalling event happened, the market share of GM and Ford in America rose by 24% and 16% respectively, while Toyota dropped by 16%. (C) The influence of the “recalling event” This Toyota event was like domino, bringing profound influence to Toyota and the global car industry. a. The global brand image of Toyota being damaged, and the reputation of Toyota being reduced As the pedal in many automobile models appeared quality defect, a large amount of automobiles were recalled, the production of some automobile types was shut down, and Toyota suffered serious losses, the product quality and brand reputation of it encountered more and more doubt. b. Toyota meeting with a waterloo in the capital market As the recalling event kept upgrading, the share price of Toyota dropped significantly. Within just a week, about 25 billion US dollars of market value evaporated. The investors couldn’t wait to sell their shares of Toyota, and international credit rating agencies also lowered their credit ratings of Toyota. c. The recalling event threatening the sales target of Toyota Originally, Toyota planned to raise 6% of its automobile sales in overseas markets in 2010, and raise 7% of its automobile sales volume in the Japanese market, but as a result of the recalling event, the implementation of such targets became uncertain. (D) Revelations of the “recalling event” of Toyota for Chinese automobile enterprises The recalling event of Toyota happened when the Chinese enterprises strived to be larger and stronger and dreamed of reaching out to the world, and provided a best teaching material for a negative example in a timely manner. The competition in the automobile industry is not just competition between competitors, but 175

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is also involved in financial wars and trade wars. If poorly prepared, the Chinese automobile enterprises may be hunted and killed before they stepped out of the country. There is always limitation in the manner of reducing prices by cutting cost; meanwhile, price war will never become a deadly weapon for domestic enterprises to fight each other. a. Quality being the foundation of survival for enterprises The rapid production expansion of Toyota provides the Chinese automobile enterprises with a profound lesson, that is to say, as a result of ignoring quality, the cost of after-sale service will be even more than service before sale. Quality problem is never minor, rather that automobiles are special commodities which involves human lives. The expansion of the automobile industry is just like expansion at the price of sacrificing quality, which is nothing else but attending to the trivialities and neglecting the fundamentals, and bringing ruin upon oneself. b. Strengthening crisis management consciousness, and promoting public relations level In the current spread environment, through the medium of mass media, the enterprises have become unprecedentedly close to the public. In the media society, enterprises need to maintain crisis warning system and crisis settlement mechanism; meanwhile, daily public relations activities also need professional operation. Therefore, domestic can not wait to consider how to timely warn before the crisis comes, how to properly deal with crisis and how to turn a crisis into a favorable turn when it comes.

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Chapter X German Bayer: Monopoly Ambition under Varnish In 2007, a new wave of merger and acquisition boom appeared in the field of chemical engineering industry. Among them, the acquisition by Bayer Health Care Co., Ltd (hereinafter referred to as “Bayer”), a subsidiary of German Bayer, of Qidong Gaitianli (hereinafter referred to as “Gaitianli”) owned by Topsun Group (hereinafter referred to as “Topsun”) was most eye-catching. In the process of this acquisition, Bayer Medicine and Health Co., Ltd purchased the OTC business of cold medicine and cough medicine (including White & Black cold pills, Composite Pseudoaphenrine Hydrochloride Syrup and Xinli pectoral syrup, and the related production facilities and national sales network) owned by Qidong Gaitianli at one stroke. If we make a comprehensive survey of this acquisition event, it seems pretty like perfection created by nature, but the ambition of Bayer to occupy the Chinese OTC market can never be concealed.

A. Bayer Bayer’’s gene (A) Acquiring gradually all the way German Bayer was established by Friedrich Bayer in 1863. On March 6, 1899, Bayer obtained the registered trademark of Aspirin, which turned out to be the most widely used and the most famous brand in the world, and which was called “medicine of the century” and brought Bayer with unexpected huge profits. In 1925, Bayer merged with a few other chemical companies and established I.G.Farben AG which was separated after the Second World War. In 1951, the company became an independent succeeding company of Farben, named Bayer Pigments Co., Ltd, which was renamed “Bayer Co., Ltd” in 1972. The company was headquartered in Leverkusen, Germany, having 750 production factories in 200 locations in six continents; with 120, 000 employees and 350 branches, almost spreading all over every country in the world. Polymer, medical care, chemical industry and 177

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agriculture are four pillar business sectors of the company which has over 10, 000 types of products, and is the largest industrial group in Germany. Bayer Health Care Co., Ltd. which has acquired Gaitianli is also a subsidiary owned by Bayer. The production ranges of Bayer involve extremely broad fields, all of which have excellent performances. The reason why Bayer is able to become an international giant in the chemicaln engineering field is closely connected to its cautious and planned overseas expansion behaviors. Looking back at the development history of Bayer, it was in fact a history of continuous mergers & acquisitions and restructurings and then striving to become larger and stronger. Almost every acquisition and merger brought it to the fore in the corresponding field. In 1996, according to the business strategy determined by the company, it would continue to take merger, coalition and acquisition businesses as a means, adjust the industrial structure and product structure, enhance and strengthen the main business of the group, and claim a bigger market share. Thus, acquisition and merger has become the major sharpened weapon of the company to expand outwards and occupy the overseas market. (B) The strategy adjustment had magical effect From the development strategy of Bayer in 1996, the company had already providently made wise adjustment of the development focus. In the same year, Bayer Group put forward new strategic objectives according to the changes of the petrochemical industry in the world: to be a worldwide leading comprehensive group operating chemicals and pharmaceuticals businesses. Bayer re-ranked its functional departments according to the importance: the health care department and the agricultural chemicals department upgraded from the third and the fourth to the first and the second respectively, while the aggregation department dropped from the first to the third place. Since then, the health care business of Bayer began unprecedentedly rapid development. According to the acquisition expenses paid by the company in 1996, the health care business accounted for as high as 45% of the total, from which we can easily see how much attention the company had paid to it. In 1996, Bayer Health Care Co., Ltd. reached a sales amount as high as 7.198 billion Marks in pharmaceuticals alone, increasing by 9% over 1995. Bayer invested even more in the research and development of the health care department, which accounted for 14.7% of the sales amount of the department in 1996, namely 1.736 billion Marks, accounting for 48.1% of the total research and development expenditures, ranking the first of the top five business sectors of Bayer Group. 178

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Today, over a dozen years later, we have to admire the foresight of Bayer’s top management at that time. Since 2006, if we conduct a comprehensive survey of the sales conditions of each department, the health care department has already outperformed its counterparts. (C) Deeply in love with Asia and decoding China In 1994, Bayer (China) Co., Ltd. was established in Beijing as a holding company. At present, Bayer has set up a total of 19 companies in the Greater China region, and the production facilities of 8 companies have already gone into operation, providing support for all the businesses in which the company involves. The percentage of localized production to the sales amount grows in each passing day. Of these 19 companies, 14 are located in Mainland China, while the remaining is distributed in Hong Kong and Taiwan regions. The Greater China Region is the second largest single market of Bayer in Asia, claiming a quarter of the total sales volume of the region. In April 1, 2007, Mr Michael Koenig was appointed Chairman of Bayer (China) Co., Ltd. and President of Greater China region of Bayer Materials Science and Technology. As early as 1996, Bayer had turned its development vision to the Asian area mainly including Southeast Asia and China. In 2002, Wenning, Chairman of the company, announced that Bayer would insist on its investment plan in China and Asia. Wenning especially emphasized that the position of Bayer in China was becoming more and more important, and would play a significant role in the next few years. Just as he said, in 2006, Bayer announced that China had become the second largest single market of Bayer in Asia. Thus, with the development strategy of the company which paid great attention to China and intended to enter and then occupy the Chinese market, Bayer Health Care Co., Ltd. began to use its conventional tricks to seek for a Chinese medicine company which might become its acquisition and merger object. Just at this time, Topsun Group appeared in their eyes.

B. Striving to start capital war and acquiring Gaitianli China had excellent internal and external economic environment, in particular, the domestic economy grew rapidly. With the continuous improvement of people’s living standards, China had started to show its potential to become a huge international market. Many large-scale transnational enterprises began to cast their covetous eyes on the Chinese market which would churn out numerous wealth opportunities, and listed the Chinese market as the next 179

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market they intended to cultivate. These enterprises were entering or had already entered the Chinese market by various means at an unprecedented speed, penetrating into every corner of this ancient Oriental country, and collecting huge wealth while witnessing the abrupt rise of the Chinese market in the entire world. It has been a long time since large-scale transnational companies began to enter the Chinese market. Many transnational companies have excellent performances. At present, more and more transnational companies take acquisitions and mergers as a shortcut to enter the Chinese market. This may be accepted as smart business practices after all. Well-known transnational companies have excellent reputations and brands with abundant capitals. Once they find Chinese companies which match their development plans in the corresponding fields, they will never hesitate to acquire or merge them even at high prices. In addition, we have noticed that more and more transnational companies choose to acquire or merge renowned Chinese companies, which are win-win partnerships on the surface, but their ambitions to expand and occupy the Chinese market can never be covered up. (A) Topsun in trouble In December 1996, Topsun purchased a state-owned enterprise named Shaanxi Wei Dong Pharmaceutical (now Topsun First Technology Pharmaceutical), and entered the high-tech pharmaceutical field as a result, being a forerunner of private enterprises acquiring state-owned enterprises in Shaanxi province, which also symbolized the beginning of Topsun stepping into the medical field. After about 10 years of development, young Topsun had already gained outstanding achievements in the pharmaceutical industry. Topsun Group controlled or participated in a total of four listed medical companies, having two national pharmaceutical production bases and two mobile postdoctoral workstations, and having realized win-win partnerships with more than 30 medicine enterprises. The company had nearly 10, 000 employees, with total assets of over 6.5 billion RMB. In 2004, the total revenues from technology, industry and trade of the enterprise reached 10 billion RMB, which made it ranking the top 20 in the pharmaceutical industry nationwide. Coincidentally, just like Bayer, Topsun Group also developed from acquisitions and mergers. Topsun had eight years of crazy acquisition period– after acquiring Shaanxi Wei Dong Pharmaceutical at the end of 1996, Topsun merged over 20 medical enterprises successively, including Qinghai Pharmaceutical Factory Co., Ltd, Jiangsu Qidong Gaitianli, Qinghai Baojiantang Traditional Pharmaceutical Co. Ltd, Shanxi Guangyuyuan Trade Co., Ltd, 180

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Hubei Qianjiang Pharmaceutical Co., Ltd, etc, owning three listed companies including Qianjiang Pharmaceutical and Topsun Science and Technology Co., Ltd, and in September 2004, Topsun acquired and controlled Yunnan Baiyao Group Co., Ltd. The success of Topsun came from acquisitions and mergers, so did its crisis. After spending all of its funds in acquiring Harbin Pharmaceutical Group Co., Ltd. and Yunnan Baiyao Group, Topsun

capital chain was strained. In fact, after years of large-scale expansion,

Topsun had been besieged on all sides. In addition to the difficulty in withdrawing 500 million RMB used to restructure Yunnan Baiyao Group, it also had to face other difficult situations, including the debts of Qianjiang Pharmaceutical, the associated secured loans and large amount of equities used in pledge or pledge financing. On March 15, 2006, Topsun Science and Technology Co., Ltd. issued its annual report of 2005, according to which the company realized total revenues of 549.2 million RMB and net profits of 35.31 million RMB in 2005; which were basically the same with the figures of previous two years. However, in the same year when CSRC Qinghai Bureau inspected the company, it was found that 180 million RMB was occupied by substantial shareholders and 222 million RMB of external guaranty was concealed, although the substantial shareholders returned the occupied capitals immediately, according to the annual report of 2005, Topsun Science and Technology Co., Ltd. still had 178 million RMB of outstanding external guarantee liabilities. Under such circumstances, Topsun Group could not help but sell the OTC business of cold medicine and cough medicine of Qidong Gaitianli owned by it, including White & Black cold pills, Composite Pseudoaphenrine Hydrochloride Syrup and Xinli pectoral syrup, and the related production facilities and nationwide sales network. The above three brands were considered as the top pillar brands of Topsun, but the group company still sold these brands to ease the tension of its capital chain, thus we can get a general idea of the predicament that Topsun was caught in. Although Topsun treated this acquisition activity as part of its restructuring program, indicating that the company would transfer its development focus from scale to effect, and would quit from the Western medicine OTC market, and focus on three business sectors including traditional Chinese medicine, modernized traditional Chinese medicine and narcotic drugs & psychotropic drugs. Wise people understood that this acquisition event had much to do with the capital problem of Topsun Group and its subsidiary Topsun Science and 181

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Technology Co., Ltd. Guo Jiaxue, Chairman of Topsun Group, also expressed that after the transaction with Bayer was concluded, Topsun Science and Technology Co., Ltd. would get about 700 million RMB funds, of which 300 million RMB would be used for loan repayment purpose while the other 400 million RMB would be used as operating funds to be invested in the “restructured” enterprises owned by Topsun respectively. (B) Infiltrating by exploiting a weak point, winning “craftily” It was not difficult for Bayer to successfully acquire Gaitianli, as to a large extent Topsun Group was in a hurry to sell Gaitianli. The contact with Novatis and Sanofi and the increasingly aggravating financial burden made Topsun helpless when dealing with Bayer. In this capital war, Bayer reflected the consistent style of Germans who were cautious, decisive yet powerful in performance, and it won this war through standing by “watching others fight” and “exploiting a weak point” and with the method of strong bargaining. Before acquiring Gaitianli, Bayer had talked with Novartis and Sanofi about this move. As competitors of Bayer, both Novartis and Sanofi wished to incorporate Gaitianli which had attractive profit-making opportunities. However, both Novartis and Sanofi chose far worse opportunities than that of Bayer, while the latter was almost waiting for Topsun to come to it. When Novatis and Sanofi negotiated with Topsun, Topsun was way from the predicament under which Topsun was not willing to sell Gaitianli. So, Topsun itself estimated the value of Gaitianli to be far higher than 1 billion RMB. Hearing the purchase maximum price of 1 billion RMB offered by Novartis, Topsun sniffed it, and it was the tough attitude of Topsun that brought a quick end to the negotiation. Compared with the radical practices of its rivals, Bayer acted more tactfully. It didn’t contact Topsun until the latter had already been in a desperate situation and the breakup of the capital chain became obvious. At that time, Topsun already lost confidence in talking up the price. Under such great pressure, Topsun had no other choice but to sell Gaitianli to Bayer. The craftiness and tact of Bayer in dealing with capital acquisition were thoroughly exposed. Facing with Topsun which was extremely feeble, Bayer exploited its weak point to bring the price down. Compared with the price of 1 billion RMB offered by Novatis, Bayer finally acquired Gaitianli at the price of 1.072 billion RMB, having no substantial difference with the previous offer. Therefore, we could say that Bayer seized Gaitianli from Topsun when the latter had no strength to strike back.

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In all three rounds of negotiations, under the strength of Bayer, Topsun made one and another concession. In the second round of negotiation, Bayer offered to acquire 54.51% of the shares of Gaitianli at the price of 1.3 billion RMB. The last round of negotiation between them in Shanghai lasted nine full hours starting from 8 p.m. in the evening. However, upon completion of the negotiation, the price agreed by both parties turned to be 1.072 billion RMB unexpectedly. On October 25, 2006 in Beijing Kerry Center, Guo Jiaxue, Chairman of Topsun signed the acquisition agreement. After that, Guo Jiaxue let out a sigh of relief, and loosened his brows which had been frowning for a long time. He considered himself to be the winner of the war. However, the biggest winner in this acquisition was actually Bayer. It defeated Novartis and Sanofi, and also won over Topsun, though its tact was not so masterful. (C) Occupying the Chinese pharmaceutical industry, fully exposing its ambition In the afternoon of October 25, 2006, after multiple negotiations, German Bayer Medicine and Health Co., Ltd and Topsun Science and Technology Qidong Gaitianli Pharmaceutical Co., Ltd (hereinafter referred to as “Topsun Gaitianli”) signed an assignment agreement in Beijing, according to which Bayer would acquire three Western medicine OTC types including “White & Black” owned by Topsun Gaitianli at the price of 1.072 billion RMB. If the performance of these three types during the delivery period reached the agreed standard, Bayer would pay an additional 192 million RMB to Topsun, thus the total transaction amount would reach 1.264 billion RMB. In October 2007, Ministry of Commerce approved the registered capital increase and the acquisition of the business assets of cold medicines such as “White & Black”. After a year, the first foreign capital acquisition in the Chinese pharmaceutical industry passed the review of Ministry of Commerce. Thoroughly researching the three OTC brands including White & Black cold pills, Composite Pseudoaphenrine Hydrochloride Syrup and Xinli pectoral syrup, which were owned by Gaitianli and acquired by Bayer, they were all renowned brands. In 2005, the total sales amount of these three brands reached 330 million RMB. In 2006, a market research company of Shanghai published a group of market data about cold medicines, according to which White & Black ranked the fourth in market share. The advantages of these three brands can be easily seen in the following table. Analysis of sales figures of Topsun Science and Technology Qidong Gaitianli 183

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Pharmaceutical Co., Ltd between 2003 and 2006 Revenues from Main

Percentage of Main

Operation of Topsun

Operation of Gaitianli to

Science and Technology

Topsun Science and

Co., Ltd

Technology Co., Ltd

39 267 445

559458709

45.41%

213 434 119

37 777 111

563376147

37.88%

2005

187 760 000

42 560 000

549202754

34.19%

2006

316 160 000

48 786 400

540371537

58.51%

Revenues from

Net Profits

Main Operation

Realized by

of Gaitianli

Gaitianli

2003

254 041 043

2004

The revenues from main operation of Gaitianli were almost equal to the sales amount of the three brands it sold From the above table, we can clearly see that a large part of sales revenues of Topsun Technology Science and Technology came from Gaitianli, which deserved to be called the pillar enterprise and hemopoiesis machine of Topsun Science and Technology. The main business of Gaitianli was the sales of three brands of products including “White & Black”. Thus, what Bayer gained was a portion of high quality assets. According to the performance of Gaitianli in 2006, annual sales revenues of 300 million RMB were sufficient for Bayer to reap the profits. However, did Bayer really take a fancy to these three brands? They were no doubt a factor that attracted Bayer, but far from the only reason. With its qualifications, Bayer would definitely pay attention to long-term interests rather than immediate interests. When acquiring these three OTC medicine brands, Bayer also purchased the sales network and sales channels of the brands, which was the deeper trigger for Bayer to acquire Gaitianli. The thing that Bayer lacked in China was not brand but marketing system and terminal network for selling products. Within ten years, Gaitianli not only brought up the widely known “White & Black” brand, but also a full set of complete marketing system. Through Gaitianli, Bayer saw a sales network spreading all of the Chinese market. Bayer was not just 184

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aiming at three brands, but also occupying the whole OTC market in China. At the price of 1.3 billion RMB, Bayer purchased the painstaking effect and endeavor of Chinese people during 10 years, as well as the efficiency it wanted. The OTC market of China is a great temptation for any pharmaceutical company, Bayer was no exception. Experts predicted that, by 2010, China would become one of the largest pharmaceutical markets in the world, the expected OTC sales amount would reach 30% to 40% of the total amount, and China would become the biggest pharmaceutical market of the world in 2020. Thus, one can easily imagine the development potential of the OTC market in China. As an important part of the OTC market, the cold medicine industry also has great development potential. According to the estimate by insiders of the industry, the market share of cold medicines in China is over 5 billion RMB. Definitely, Bayer will not give up this good opportunity to enter the OTC market in China. In fact, as far back as before the time when acquiring Gaitianli, Bayer already had direct engagement with international transnational pharmaceutical giants in the hospital field, including Novatis and Astrazeneca. Now, the success in acquiring Gaitianli has made Bayer take the cake in the battle of seizing the Chinese OTC market with no doubt. The high price Bayer spent in acquiring the sales network of Topsun “White & Black” would turn out to be asset of a wholly-owned subsidiary owned by Bayer. With such result, Bayer rapidly rose from the 25th to the top 10 in the OTC market of China, which became a crucial timing for the global OTC market strategy layout of German Bayer. With the addition of the acquisition of OTC market business owned by Roche, Bayer became a giant in the global OTC field, and ranked among the top three in the world.

C. Gaitianli: what to do with the “trophy trophy”” Gaitianli has already been a trophy for Bayer in the capital war. However, we do not know how it will develop in the future, how will Bayer orientate the position of Gaitianli in the Chinese Pharmaceutical market, and how will Bayer plan the prospect of Gaitianli. All of these become elusive. We can be sure that Bayer has the strength to operate Gaitianli well, but the key lies in whether Bayer is willing to or considers it worthy to operate Gaitianli well. Looking back on the fate of the joint ventures of Bayer in China, maybe we can find some

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clues to the answers. (A) Failing cases of Bayer’s joint ventures in China Before acquiring Gaitianli, Bayer had no precedent in acquisition or merger. Bayer only had two forms of enterprises including sole proprietorship and joint venture. However, as long as we observe carefully, we can find that, as a giant in the chemical industry, Bayer also had experience of waterloo. This is more worthy of our attention. In 1998, Bayer once signed an agreement with Zhongxi Pharmaceutical Co., Ltd, according to which Bayer Zhongxi Agricultural Chemical Co., Ltd and Bayer Zhongxi Household Consumer Goods Co., Ltd would be jointly established in Pudong Economic Development Zone in Shanghai. In this cooperation, Bayer contributed 5 million US dollars in aggregate. In particular, Bayer invested 29.706 million US dollars in Bayer Zhongxi Agricultural Chemical Co., Ltd, of which German Bayer accounted for 70% of the shares while Zhongxi Pharmaceutical Co., Ltd accounted for 30%. The company was designated to produce agricultural chemicals, the main material of which was synthetic esbiothrin, and the goal of the company was to become a high-tech pesticide production enterprise with an annual output of 200 tons of Cyfluthrin, 100 tons of betacyfluthrin and 1600 tons of pesticide preparation. At that time, fenvalerate produced by the pesticide department of Zhongxi Pharmaceutical Co., Ltd was one of its renowned brands. With regard to Bayer Zhongxi Household Consumer Goods Co., Ltd, Bayer invested 15.6 million US dollars in aggregate, the goal of which was to become a household consumer goods enterprise with processing, packaging and environment protection businesses and with an annual output of 8 million jars of aerosol, 140 million electric mats and 10 million units of crystal electric mats with the “Beginor” brand. At that time, Zhongxi Pharmaceutical Co., Ltd operated steadily and performed excellently., Zhongxi Pharmaceutical Co., Ltd gained net profits of 23,910,769.25 RMB, 27,096,640.61 RMB and 34,364,267.59 RMB respectively in 1996, 1997 and 1998, and increased 13% and 26% in net profits respectively in 1997 and 1998; in 1998, the main operation revenues of the company increased by nearly 15% comparing with those in 1997. It can be said to be a developing enterprise with excellent performance growth. Zhongxi Pharmaceutical Co., Ltd had excellent sales performance in medicine, pesticide and domestic hygiene medicine fields, and accounted for certain market share in their respective fields at home and even abroad. As an international giant which was also leading in the above three fields, maybe it was because 186

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of these reasons that Bayer set up a joint venture with Zhongxi Pharmaceutical. By attracting sufficient foreign trades and taking in advanced production and management experience from overseas, Zhongxi Pharmaceutical would further raise the technology level and management level of the enterprise, and speed up the pace of development as well. It was reported that, after the two joint ventures began normal operation, besides satisfying the demand from the domestic market, the products of them were used for export, and other pesticide or midbodies used for ready mixture by the joint ventures were generally products of other enterprises of Zhongxi Pharmaceutical. The win-win partnership which was illustrious at that time completely collapsed after less than five years. Shortly after the establishment, Bayer Zhongxi Agricultural Chemical Co., Ltd and Bayer Zhongxi Household Consumer Goods Co., Ltd began to show a deficit. In front of such situation, as the main holding company which accounted for 70% of shares, Bayer didn’t assume the due responsibility as a substantial shareholder, but adopted the way of letting things drift rather than coping with them positively. The reason why Bayer sat there watching was that after the business restructuring and adjustment of the headquarters, the current developing focus of Bayer was medical care, crop science and innovated material (which had been mentioned above), even in October 2002, Bayer sold the agricultural insecticide and fungicide products department to BASF at the price of 1.16 billion US dollars; and in November of the same year, Bayer sold its domestic pesticide business to SC Johnson at the price of 732 million US dollars. Thus we can easily see that Bayer was no longer interested in the agricultural & household health field. Thus, Zhongxi Pharmaceutical was faced with an awkward situation, which showed a deficit in 1999, and faced the danger of being delisted. The huge loss of Bayer Zhongxi Agricultural Chemical Co., Ltd and Bayer Zhongxi Household Consumer Goods Co., Ltd was actually a disaster piling up on one another to Zhongxi Pharmaceutical. Although Zhongxi Pharmaceutical once tried to reverse the deficit situation of the two joint ventures, Bayer didn’t show an attitude of coordinator. As a result, between November 26 and December 8, 2003, Zhongxi Pharmaceutical signed a series of documents with Bayer (China) Co., Ltd and terminated its cooperative operation with Bayer Zhongxi Agricultural Chemical Co., Ltd (“Bayer Agricultural” for short) and Bayer Zhongxi Household Consumer Goods Co., Ltd (“Bayer Household” for short). Thereafter, the alleged win-win partnership came to an end. As of December 31, 2002, Bayer Agricultural (without operation after establishment) had a book value of total assets of 158,436,500 RMB, with gross liabilities of 18,261,200 RMB, 187

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net asset of 140,175,300 RMB, and a total amount of 41,988,300 RMB which could be used for repayment; while Bayer Household had a book value of total assets of 21,520,000 RMB, with gross liabilities of 168,237,500 RMB, net asset of minus 146,717,500 RMB, and a total amount of 21,520,000 RMB. In this cooperation, Bayer lost 168 million RMB, which was not much to be concerned about. However, for any Chinese enterprise, especially any newly developed enterprise, 168 million RMB of loss meant perdition. Nonetheless, who could expect such a result at the beginning of cooperation? Who could expect that Bayer would sit there watching in front of such deficit predicament? This at least illustrated such a point: a large-scale transnational enterprise ranking the top 500 of the world was not a firm prop, especially in front of the drive by interest. In the above example, Bayer would rather give up 168 million RMB of revenues than procure the completion of global restructuring business of the whole company. Bayer never expected how painful it would be for a Chinese enterprise. A transnational enterprise would never be or may be a savior of the world. (B) Global trust crisis of Bayer In the process when the company developed rapidly, since 1980s, Bayer had been troubled with multiple lawsuits. In particular, the most serious were the “AIDS Crisis” and the “Lipobay Homicide Case”. In August, 2001, the cholesterol lowering drug “Lipobay” developed by Bayer led to homicide cases continuously, and raised great disturbance in European countries including Italy. In accordance with the figures released by newspapers in Italy at that time, there were about 6 million patients taking “Lipobay” around the world, the vast majority of who were between 50 and 70 years old. In Western countries, there had already been 52 persons who died from “Lipobay”, and some media even alleged the number to be over 200. According to the survey of Germany Federal Institute for Drugs and Medical Devices, Bayer concealed what it knew about the cases. The company had long known that “Lipobay” had serious side effect, but never revealed it to the public. However, the spokesman of Bayer considered the accusation of concealing truth to be untenable, as the relationship between “Lipobay” and death was just a speculation, having no direct evidence. In August, 2002, Bayer announced to revoke “Lipobay” from the market. In June 2003, a number of hemophiliacs from multiple countries in the world put forward an 188

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accusation against German Bayer and several other pharmaceutical companies to the federal court, collectively alleging that these companies had provided the hemophiliacs with blood products polluted by HIV and hepatitis virus and which were donated by patients between 1984 and 1985, causing several thousand of hemophiliacs to be infected by HIV, and more than 1000 of who died as a result. However, before this, as the infectivity of AIDS and hepatitis was already understood, these products were forbidden from sales. Although Bayer denied all these charges, this 15 years long lawsuit was ended by 600 million US dollars of penalties on Bayer and three other companies which produced blood concentrating preparations. The type of controversial blood products produced by Bayer was named “Gene 8 Type” concentrating agent, which could restrain or prevent deadly bleeding of hemophiliacs. In the early phase after AIDS was determined, a dose of such blood product needed to be extracted from over 10,000 blood donors. As there was no detective reagent regarding HIV at that time, when taking such preparations, some hemophiliacs were infected by HIV at the same time. Recently, negative news including the statement that Bayer manipulated prices in the German market and the United States market were exposed. This series of events brought serious doubt to the social image of Bayer, and the absence of social responsibility sense also disappointed the worldwide public. As an international large-scale transnational company, if it doesn’t assume the corresponding social responsibility, the commitments it has made to the worldwide public, to its subsidiaries and to its joint ventures will become void and unconvincing, which is the last situation we will be willing to see. (C) Concern about domestic brands Due to the modification in ownership, the fates of Gaitianli which have been incorporated to Bayer and three OTC brands including “White & Black” cold pills, Composite Pseudoaphenrine Hydrochloride Syrup and Xinli pectoral syrup previously owned by Gaitianli became unpredictable. With the precedent of Unilever which acquired Chinese brands and then restrained them and which was named a killer of domestic brands, we can not guarantee that Bayer will never become the next Unilever. Our concern about the future of domestic brands which have been incorporated by foreign funded enterprises is not without reason. It is beyond reproach for transnational companies to endeavor to pursue profit maximization. With regard to transnational company as Bayer which has sufficient capital strength and owns excellent brands, the more important goal of acquisition and 189

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merger is to explore the market, so as to input its products to every corner of the market. Regarding the acquired Chinese national brands, if they are able to develop well, it will leave nothing to be desired; but if it is not the case, in my opinion, Bayer will not care much, after all, they are not brands of Bayer, and even if these brands fail, products of Bayer itself will take the place, so there is nothing to worry about. Therefore, the win-win partnership that both parties alleged solemnly upon acquisition has existed in name only for a long time. However, Bayer will not spend time in considering about these problems, indeed, for Bayer, these can not be treated as problems at all. The only thing Bayer cares about is the profit statement and the increase percentage of profit at the end of the year. Thus, we can’t hand our brands over with full trust to Bayer just on account of its reputation. We should know that, in the current market, the increase in proceeds can often surpass many other things and rank in the front, and we have to inspect such acquisitions with rational vision. With the lesson of Bayer Agricultural and Bayer Household which failed in operation, we can not hand our national brands over with full trust to transnational companies, even if they are the top 500 companies in the world. It was premature and caring only for immediate interests when Topsun sold its Gaitianli. Moreover, the three brands owned by Gaitianli were all Chinese brands, which were pretty superior assets and national brands delicately cultivated in years, but now they have unpredictably fallen into the hands of foreign companies. This can be attributed to the misunderstanding of quite a number of Chinese enterprise leaders, who have so much confidence in internationally renowned companies as even to the extent of fetishistic, considering that such large companies will definitely operate the acquired companies well. However, this is not the case. It is just because these large companies have so huge businesses as spreading all over the world that they can ignore the small acquired companies. Before acquisitions, Chinese companies are already in an unequal position compared to large-scale transnational companies. As a result, after acquisitions, the fate of these Chinese companies will completely fall into the hands of the transnational companies. The win-win partnership we often hear about is nothing but a kind of void statement. With this explanation, it is not without reason that we concern about the national brands which are being acquired or have been acquired. Therefore, Chinese enterprises should rationally treat the acquisitions and mergers from transnational companies to Chinese 190

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companies, especially some transnational brands with excellent performance. We have to see clearly that the transnational companies are commencing capital wars which seem quite, having no smoke but are actually damaging the interests of Chinese enterprises. In addition, among the national brands, there should be conscious of mutual help and synergic development. Under the fully open market, there have to be enough strong national consciousness. The leading national brands should unite together and fight with transnational companies. Only by continuous competition and tempering our own enterprises can we truly develop national brands and build competitive Chinese national brands.

D. The threat theory of transnational pharmaceutical enterprises With the increasingly deepening of the openness degree of the Chinese market, more and more transnational pharmaceutical enterprises have entered in the Chinese market, and conducted fierce competition against Chinese pharmaceutical enterprises by virtue of their enormous advantages, and carved up China pharmaceutical market. From the current situation, transnational pharmaceutical enterprises have brought about a great threat to Chinese pharmaceutical enterprises, and the fate of Chinese pharmaceutical enterprises becomes worrisome. (A) Chinese pharmaceutical enterprises in a dilemma “Weak Western medicines”: when the Chinese medicine market opened up to the outside world, the vast majority of Chinese pharmaceutical enterprises had not prepared well. This had much to do with the lag of Chinese pharmaceutical technology. Some expert expressed that China had been as long as ten years behind developed Western countries in Western medicine production technology, and China had too many problems to deal with its own research and development ability, as Chinese pharmaceutical enterprises tended to model on medicines already existed. According to the product life cycle theory, when foreign large-scale pharmaceutical companies have already turned to the phase of research and development on new drugs, Chinese pharmaceutical enterprises are still in the phase of modeling and processing old types of drugs, having not mastered the core technology yet. Based on the national conditions of China, the research and development of drugs can be divided into three steps: complete modeling in the first step, simulating innovation in the second step and realization of independent innovation in the third step. Now we are still endeavoring to stride forward the second step, far from the condition in developed Western 191

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countries. Of the drugs produced by domestic enterprises, 97% are generic drugs, and in the various generic drugs, there is high degree of multiplicity, the quality is not excellent enough, and the drugs are of no competitiveness at all. The generic drugs produced by our country can never replace the imported drugs, letting alone competing with international brands in the international market. There is a vivid example: after the “9·11” Event, due to the demand for treatment of inhaled anthrax, significant more Ciprofloxacin were needed. At that time, German Bayer immediately announced to provide the market with 300 million tablets of such medicine. Many people wondered, the internationalization level of Ciprofloxacin produced by our country was so high, but why didn’t our country seize this market. In fact, none preparation produced by any Chinese enterprise was approved by the FDA in the United States, thus none of them was able to enter the American market. “Flabby traditional Chinese medicine”: originally, the traditional Chinese medicine of which Chinese people are proud could have been a resounding brand. However, as the Chinese people valued traditional Chinese medicine too late, traditional Chinese medicine had not been developed systematically, and as a result, today when the Chinese medicine market has opened up to the world, it can’t be a mainstay of saving China pharmaceutical enterprises. Although traditional Chinese medicine is attached importance to in the recent years, in front of the impact from Western medicine, the development process is far from ideal. According to the statistics released by National Pharmaceutical Digital Library of China, between 2002 and 2005, the industrial development trend of major industries in China (including the Chinese patent drug industry and the traditional medicinal slices industry) was smooth. In 2005, major industries in China realized a gross output (current price) of 116.967 billion RMB, accounting for only 26.4% of that of the national pharmaceutical industry (442.272 billion RMB); the sales revenues were 108.625 billion RMB, accounting for 25.5% of those of the national pharmaceutical industry (421.132 billion RMB); the total profit was 10.209 billion RMB, accounting for 29.0% of that of the national pharmaceutical industry (35.260 billion RMB). Between 2002 and 2005, the average growth rates of the gross output, sales revenues and total profit in the traditional Chinese medicine were 19.9%, 18.5% and 11.6% respectively, all lower than the average levels (25.2%, 23.9% and 21.4%) of the national pharmaceutical industry. Generally speaking, the traditional Chinese medicine industry remained a relatively steady development trend in recent years, lower than the national pharmaceutical industry, and there was certain gap to the rapid growth rate of the pharmaceutical industry in recent years. 192

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Hence, on the background of “weak Western medicines” and “flabby traditional Chinese medicine” when the whole industry was weak, in front of the international transnational pharmaceutical enterprises, one can easily imagine the consequences. (B) Foreign pharmaceutical enterprises make every endeavor to disrupt the state-owned enterprises Why do the foreign pharmaceutical enterprises haste to squeeze into the Chinese market? In addition to the great consumption potential in the Chinese market, they also settle on the weak competitiveness of Chinese enterprises, whereby the cost for seizing the Chinese market will be significantly reduced, as every invader earnestly longs for a battle at a tiny price. There is neither strong pharmaceutical enterprise nor proprietary patent technology in China, so transnational pharmaceutical enterprises can easily drag down the Chinese pharmaceutical enterprises. They put expensive proprietary drugs into the Chinese market, as China had neither technology to produce substitute drugs nor proprietary patent technology, China had nothing to do but accept. Depending on the edge tool of patent protection, the current international pharmaceutical giants are able to remain in a leading position, the sales amounts of their patent products are quite amazing, for example, MSD accounts for 44%, Bayer accounts for 41%, Lilly accounted for 38%, Pfizer accounted for 36%, Sino-American Squibb accounts for 33%, and GlaxoSmithKline accounts for 29%. After the expiration of patent protection period, transnational companies will not quit such medicine market therefore, the customary tact of them is to significantly reduce the prices of patent products, and still firmly occupy the Chinese pharmaceutical market with their brand effect and sales networks they have forged. Even if China has mastered such technologies, it can’t earn much profits either. Thus, a lot of profits flow into foreign pharmaceutical enterprises, which plunder the profits made by large-scale Chinese pharmaceutical enterprises. The fate of Chinese pharmaceutical enterprises is quite tragic. In 2006, China pharmaceutical industry realized a profit of 41.298 billion RMB, presenting a wavy growth trend across the year, but still standing in a low level in history all the time. There were 1368 enterprises in deficit in aggregate, accounting for 22.62% of the industry; the cumulative losses reached 4.463 billion RMB, increasing by 27.37% on a yearly basis. Moreover, many of these companies facing bankruptcy could not afford so fierce competition. Then, can we still expect that these transnational companies would solve social problems including company collapses and unemployment therefrom?

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(C) Concealing the ambitions by various excuses After all, large-scale transnational pharmaceutical enterprises have rich experience in transnational sales, so they will never be willing to let the securable profits go, nor be kind to the Chinese pharmaceutical enterprises which are their rivals, but will gradually plunder the Chinese market quietly. Seemingly, they are increasing investment in China and bringing China with advanced production technologies and management methods, but in essential they are exploiting the cheap labors in China; according to a report of Burrill & Company, a renowned biomedical consulting company in the Stated States, regarding the cost of research and development labors, the cost for an American company to employ a full-time doctor is about 300,000 US dollars per year, while only about 30,000 US dollars in China, which is 1/10 of the former. With respect to the cost for implementing a typical research and development plan, the total cost in China is 1/5 of that in the United States; it is almost the same with the cost in new drug clinical trials. If pre-clinical animal experiment is conducted in China, there will be a large number of all kinds of experimental animals to be supplied, and the prices of which are usually quite cheap. For example, with respect to the experimental SDF class rat, the unit price in our country is 25 RMB, but is as high as 20 to 30 US dollars in the United States, about seven times of the former. Big experimental animals such as dogs and monkeys are even rarely used in developed countries, and the costs are even higher. Regarding the clinical trials expenses only (excluding free supply of experimental drugs), the expense for completing one clinical trial of antitumor drug is about 10,000 RMB, while it will be 20,000 US dollars in the United States, about 17 times of that of our country. Furthermore, as the most direct result of transnational pharmaceutical enterprises entering the Chinese market in succession, transnational pharmaceutical enterprises and Chinese pharmaceutical enterprises begin to strive for domestic research & development talents in China. Excellent talents are induced away by transnational pharmaceutical enterprises, leaving an awkward situation of talent famine for Chinese pharmaceutical enterprises. More aggravatingly, transnational pharmaceutical enterprises arrange the Chinese talents who are “cheap in price and high in quality” to engage in basic research work, while the core technologies still remain in the headquarters, and the active ingredients of many types of drugs are still produced in their own countries. That is to say, although the research and development centers of transnational pharmaceutical enterprises are moved to China, China still stands in the position of “worker” for foreign enterprises, having no fundamental 194

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change. That is the real purpose why transnational pharmaceutical enterprises continuously move their research and development centers to China. (D) The trend of joint monopoly With more and more international large-scale pharmaceutical companies entering the Chinese market, Chinese medical pharmaceutical enterprises can not resist the impact from transnational pharmaceutical enterprises; in this case, market monopoly begins to be a concern of the public. From the current situation, it is unlikely for a transnational enterprise to form monopoly. After all, every large-scale transnational pharmaceutical enterprise has its own preponderant fields, as the degree of correlation of the drugs, the degree of overlap and the degree of substitution have not reached certain levels, the competition among all the transnational pharmaceutical enterprises is well-matched in strength, and none of them is so strong as to lead the market. However, the trend of joint monopoly and ruling according to the fields which are directing together by foreign pharmaceutical enterprises appears more and more clear. At present, the Chinese medical equipment market is firmly grasped by foreign pharmaceutical enterprises; in particular, American GE, German Siemens, Dutch Philips and Japanese Toshiba have already formed a layout of “four major manufacturers occupying the Chinese large-scale imageology equipment market”; the absolute powerful position occupied by transnational pharmaceutical enterprises in the high-end medicine market even arouses the concern of “transnational pharmaceutical enterprises monopolizing the high-end and smothering national industries” from insiders. We have to be clearly convinced that foreign pharmaceutical enterprises have begun to conduct a monopoly war without gun smoke and accelerate their paces of monopoly in the pharmaceutical industry which connects with the livelihood of the public. If Chinese pharmaceutical industry is still unable to perform effective structure adjustment and development strategy transformation, in the foreseeable future, the pharmaceutical industry in China will be controlled by transnational pharmaceutical enterprises, when Chinese people need to pay a price determined by the foreigners when seeing a doctor or taking medicines. Who can say the pharmaceutical industry is not the lifeblood industry of a country? And how can we let it be occupied by so crazy monopoly of foreign pharmaceutical enterprises? It is a question that every Chinese person should think about which is more important 195

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between the negative effect and the positive effect for transnational pharmaceutical enterprises entering the Chinese market. Taking a broad view of the current international economy, you will find it no longer a dog-eat-dog world. Even for the stronger, there is still a danger of being swallowed. For Bayer which is even stronger, it has only begun its acquisition and merger war in the capital market of China. One senior executive of China Region of the Medical and Health department of Bayer once expressed that, in order to vigorously expand its OTC market in Asia, Bayer Group collected 1.5 billion US dollars specially, a vast majority of which would be used in the Chinese market. “We hope to rank in the top three in Chinese OTC market in the end.” That is the ultimate goal of Bayer. While Chinese pharmaceutical market is meeting the entries of one after another international pharmaceutical enterprises with an unprecedented open attitude, Chinese national brands are also facing with severe challenge and test. This capital war without gun smoke will continue. And we want to see that Chinese domestic companies can stand firm in this war, and dominate Chinese OTC market and Chinese pharmaceutical industry as well.

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Chapter XI Johnson & Johnson: Capital Plunder in China Johnson & Johnson’s Slogan, “Born for Love”, is familiar to the populace. Band-Aid, Tylenol, Johnson & Johnson Baby Care Series and other star products of Johnson & Johnson also enjoy popular support. Johnson & Johnson, an old company with over 100 years of history, has gained its foothold in Chinese market. Although it has made contribution to the health of China, it has earned lots of profits from the vast Chinese market as well. With China’s relaxing of the restrictions to foreign-owned enterprises, the transnational companies are increasingly prone to set sole proprietorships in China, and Johnson & Johnson is also gradually adjusting its capital importing mode to China.

A. Johnson & Johnson Johnson & Johnson, established in 1886, is a manufacturer of health care products and consumer nursing products with large scale and diverse products. Johnson & Johnson is a reliable company which devotes to the worldwide health for over 100 years. It has 200 subsidiaries in 54 countries with more than 112,000 employees worldwide, and with the products selling well in 175 countries all over the world so far. Johnson & Johnson established its first joint venture in China in 1985. And it has 5 subsidiaries in China with over 6,000 employees till now. Johnson & Johnson was established by Robert Wood Johnson and two of his brothers in New Brunswick, New Jersey, USA in 1886. At the beginning of its establishment, Johnson & Johnson was engaged in sterile surgical dressing with only 14 employees, and held the leading position in the industry. With the business expansion and development requirement, Johnson & Johnson successively established new international companies in America, Europe, Africa, Asia and Australia, etc since1920s. Its global sales amount of the year 2007 was 53,324,000,000 US dollars. As one of the top 500 global corporations, Johnson & Johnson obtained a series of awards in various fields for a long time: The Best Company of Working Mother by Working Mother Magazine in successive years from 1986; the Listed Company with the Best Business Performance in USA of the Year 2001, as well as the Top One of Fifty Companies with Outstanding Performance and Company with Optimal 197

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Reputation in USA of the Year 2002 by Business Week; the fifth of the Most Admired Companies in USA of the Year 2003 and No. 1 in Year 2003 and 2004 by Fortune Magazine; the Global Sales of Johnson & Johnson in the Year 2004 was 47.3 billion US dollars; the seventh of the Most Admired Companies in USA and No. 1 in the Pharmaceutical Industry by Fortune Magazine; the ninth of the Most Admired Companies in USA and No. 1 in the Pharmaceutical Industry by Fortune Magazine. Structure of Johnson & Johnson: Johnson & Johnson is a decentralized company with sound cultural essence. Its board of directors has 13 directors with William. C. Weldon serving as CEO. The executive committee, composed of 10 members, is the key administrative organization in charge of the operation and resource allocation, among which several chairmen of the committee are responsible for the management direction of the whole company and play a leading role in other specific functions These committees supervise and cooperate with the head office in USA and other international subsidiaries in contacting with the departments of consumer goods, pharmaceutical factory, medical devices and other diagnosis business departments; while the international subsidiaries are operated mainly by local employees. Such decentralized company structure provides vast space for the development of Johnson & Johnson. One of the gains from the emphasis on training managers by Johnson & Johnson is the soundness of the management. Notwithstanding the 50 billion US dollars sales and over 100,000 employees, there are only six directors promoted from its internal employees during its 117-years’ history. Weldon, the chairman and CEO, is the sixth director. Weldon graduated from Quinnipiac University and joined Johnson & Johnson as the marketing representative in McNeil Company (a subsidiary of Johnson & Johnson) in 1971. After the trainings of manufacture, marketing and management, he was appointed to Philippines, South Korea, Britain and other countries to serve as different roles. Weldon returned to USA to act as the vice president of Janssen Pharmaceutical Ltd in 1989. He began to lead the EthiconEndo-Surgery business of Johnson & Johnson from 1992 and undertake the medical business of the whole company from 1998. Weldon was officially recorded in the board list in February 2001.

B. War for capital in China (A) War for capital purchase Johnson & Johnson has five companies in China at present, namely, Xi’an-Janssen 198

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Pharmaceutical Ltd, Johnson & Johnson (China) Co., Ltd, Shanghai Johnson & Johnson Pharmaceuticals, Ltd, Johnson & Johnson Medical (China) Ltd and Johnson & Johnson Vision Care (Shanghai) Limited, two of which are joint ventures, i.e. Xi’an-Janssen Pharmaceutical Ltd and Shanghai Johnson & Johnson Pharmaceuticals, Ltd, and the rest are sole proprietorships of Johnson & Johnson. Capital recovery was conducted in the two joint ventures: Xi’an-Janssen Pharmaceutical Ltd was a joint venture established by Janssen Pharm. N.V of Belgium (a wholly-owned subsidiary of Johnson & Johnson), Shaanxi Pharmaceutical corporation, HanJiang Pharm. Plant, Sino-Pharm. Co. and China National Pharmaceutical Foreign Trade Corporation (Sino-Pharm. Foreign Trade) in 1985 with a decentralized stock equity 52% of which was possessed by Johnson & Johnson. HanJiang Pharm. Plant assigned 1.8% of its stock equities in Xi’an-Janssen to Johnson & Johnson in 2007. Shanghai Johnson & Johnson Pharmaceuticals, Ltd, a joint venture established by Johnson & Johnson and Shanghai No. 1 Biochemical & Pharmaceutical Co., Ltd, was the first pharmaceutical company established by Johnson & Johnson that specially manufactured over-the-counter products (OTC). Shanghai No. 1 Biochemical & Pharmaceutical Co., Ltd wholly assigned its 10% stock equities to Johnson & Johnson in 2005; therefore, Shanghai Johnson & Johnson Pharmaceuticals, Ltd became a first sole proprietorship of Johnson & Johnson in China. A. Centralizing stock equities to force Chinese to submissively relinquish the “money spinner” (a) Xi’an-Janssen in the early phase Johnson & Johnson possessed 52% stock equities of Xi’an-Janssen in the early phase, and the rest were possessed by four other Chinese shareholders. Such equity structure was determined at the time of the establishment of the joint venture. Xi’an-Janssen Pharmaceutical Ltd came into existence in October, 1985 with the total investment of .1.9 billion RMB. It was a joint venture of 50-year’s joint term established by Janssen Pharm. N.V of Belgium (a wholly-owned subsidiary of Johnson & Johnson), Shaanxi Pharmaceutical corporation, HanJiang Pharm. Plant, Sino-Pharm. Co. and China National Pharmaceutical Foreign Trade Corporation (Sino-Pharm. Foreign Trade) with 52% of its registered capital possessed by the foreign party and 48% by the Chinese party. Xi’an-Janssen is the largest pharmaceutical joint venture in China, with its headquarters in 199

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Beijing and production base in Xi’an. The company produces and sells high-quality products. During the past 20 years, the company developed continually and stably and was one of the leading pharmaceutical joint ventures in China. It has been holding the leading position in the pharmaceutical industry in China for 13 successive years so far. Xi’an-Janssen produces and sells over 20 kinds of patent medicines in the areas of fungi epidemiology, gastrointestinal disease, psychiatry, neurology, immunology, anesthesia pain control, allergology and infectious disease. Xi’an-Janssen Pharmaceutical Ltd has far-reaching goals and will continue to introduce new drugs in the areas of biological, oncology, cardiovascular, rheumatism and urinary. It has more than 50 cooperative projects in the fields of medicine, public health, pharmaceutical R&D, and GMP management. Xi’an-Janssen is a member of RDPAC (R&D-based Pharmaceutical Association Committee), and one of the transnational companies with the earliest entry in Western China. Under the direction of China’s reform and development policies, Xi’an-Janssen develops constantly and obtains distinct progress over the years. The mission of Xi’an-Janssen is to be faithful to science and devote to providing health services. Meanwhile, it is probing into that how the company disciplines, and makes its own efforts to create brand and serve in good faith. We hope that the whole society can assist us in setting up a platform to care about the quality and integrity of the company’s products. (b) Profit condition The sales of Xi’an-Janssen were more than 3 billion RMB with profits of over 240 million RMB in 2006. HanJiang Pharm. Plant acquired the equity income of about 11.52 million RMB from such profits by holding 4.8% of equities of Xi’an-Janssen. However, other primary businesses of Xi’an-Janssen were deficient slightly, and the profitability was unsatisfactory. The profit was mainly from Xi’an-Janssen’s investment income. At present, the equities holding by HanJiang Pharm. Plant brings it with more than 10 million RMB of profits each year. (c) The foreign capital holding strength increased The objective of foreign capital’s coming into China is pretty explicit, i.e. to occupy China’s Pharmaceutical market. It is increasingly matured over the years with superior ability to acquire profits from the companies controlled by it rather than share the same with Chinese companies. Transnational pharmaceutical companies increase their investments in China 200

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through changing from the original emphasis on industrial investment to R&D investment. 13 out of the 14 largest foreign-funded pharmaceutical companies in China are held by foreign parties, among which 52% of equities of Xi’an-Janssen are held by the foreign party. However, in respect of the joint ventures prepared to be established in the recent years, the foreign parties generally require possessing more than 90% of their equities. The overweight of the joint venture’s equities by foreign parties is not news any more; instead, to a large extent, it is an equity competition between parties with unequal strength. Foreign parties are the foreign-funded pharmaceutical holding giants with sound technical capital. However, Chinese parties are local pharmaceutical companies joined at the primary phase of the establishment of the joint venture pharmaceutical companies. Local pharmaceutical companies can do nothing but make concessions of their interests in respect of the acquisition demands made by the foreign parties with respect to integral development. It is affirmative that such course will be much quicker provided that there is no restriction of submitting for approval from the Ministry of Commerce in the new stipulation of foreign merger and acquisition. HanJiang Pharm. Plant, a subsidiary of Huapont Pharm., held 4.8% of equities of Xi’an-Janssen. It intended to assign 1.8% of the equities to Johnson & Johnson with an assignment ratio of 37.5%, which was approved by the Ministry of Commerce. The total assignment amount HanJiang Pharm. Plant obtained from such equity assignment was 78 million RMB. In respect of such assignment, HanJiang Pharm. Plant was unwilling to sell such equities. However, the primary businesses of HanJiang Pharm. Plant were slightly deficient, and the profitability was unsatisfactory. The profit was mainly from Xi’an-Janssen’s investment income. At present, the equities holding by HanJiang Pharm. Plant brings it with more than 10 million RMB of profits each year. The Chinese party is just a small shareholder of Xi’an-Janssen, and this assignment is for the integral development of Xi’an-Janssen by Johnson & Johnson, therefore, the Chinese party has little right to speak. The relevant person from Security Department of Huapont Pharm. said that, they were unwilling to sell any equity of Xi’an-Janssen, let alone 1.8% of equities, but they had no other way. Johnson & Johnson intended to possess more equities in its subsidiaries in consideration of its strategic aspects. Shen Rulin, vice president of Xi’an-Janssen, said that equity centralization was advantage to the operation of 201

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Xi’an-Janssen. It’s acknowledged that Johnson & Johnson originally intended to withdraw all the 4.8% of equities from HanJiang Pharm. Plant. However, after the negotiation among several parties, it was determined that only 1.8% of the equities should be assigned to Johnson & Johnson, while the rest 3% should be retained. Johnson & Johnson had pretty abundant reasons, Johnson & Johnson wished to enlarge the scale of its subsidiaries in China, provided that the concentration should be increased. Johnson & Johnson desired to introduce more products and projects. The continuous decentralization of the equities would delay the investment. Therefore, Johnson & Johnson wished to withdraw the remaining 3%. The investment modes of transnational pharmaceutical companies are changed gradually in China. Due to the policy restrictions and the development demands, most of the transnational companies chose a Chinese partner at the primary phase. Their understanding of Chinese market ten years ago cannot be compared with that of today. It is known that in respect of the joint ventures preparing to be established in the recent years, the foreign parties generally require possessing more than 90% of their equities. So is Xi’an-Janssen. HanJiang Pharm. Plant holding 4.8% of equities of Xi’an-Janssen assigned 1.8% of equities to Johnson & Johnson with the assignment ratio of 37.5%, which meant that other Chinese shareholders assigned 37.5% of their equities of Xi’an-Janssen to Johnson & Johnson. If the assignment amount of such 1.8% was 78 million RMB, Johnson & Johnson will spend 780 million RMB to purchase the equities from Chinese shareholders. There are other Chinese shareholders required to assign as planned. Rulin Shen, vice president of Xi’an-Janssen, said that four Chinese shareholders assigned their equities of Xi’an-Janssen to Johnson & Johnson in the same ratio. Upon the fulfillment of the assignment, the shareholding ratio of Johnson & Johnson will be 70%, and that of the four Chinese shareholders will be 30%. (d) Competitive companies in the same industry Johnson & Johnson is not “the first person to try tomato”. Several foreign-funded pharmaceutical companies began to extensively withdraw the equities issued before. Pfizer Pharmaceutical Co., Ltd, a joint venture established by America Pfizer and Dalian Pharm. Plant, went through the similar equity transition. It is acknowledged that the ratio of the investment of foreign parties to Chinese parties was 60:40 in such joint venture at its establishment in 1989, and then around 2002, the foreign party held as many as 97% of the 202

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shares while the Chinese party held 3%. It is also learned that the shareholding proportion of the Chinese party has been reduced to 1%, while the remaining 99% is held firmly by Pfizer at present. As one of the earliest joint ventures, the equity ratio of the Chinese party to the foreign party in Capsugel was 50:50 at the early phase of the joint venture. In addition to the prior 50%, Pfizer acquired 25% of the equities from Chinese shareholders in 2005, thus Pfizer, as the largest shareholder of Capsugel, possessed 75% of the equities. Beijing Double-Crane Pharmaceutical Co., Ltd (DCPC) declared to assign its 35% of equities it held in Beijing Fresenius Pharmaceutical Co., Ltd (BFP) to Fresenius Kabi (China) Co. Ltd on March 23, 2005, thus, BFP was changed from a joint ventured pharmaceutical company to a wholly foreign-owned company under Fresenius Kabi (China) Co. Ltd. Beijing Novartis Pharma Co., Ltd was the first and the largest joint venture pharmaceutical company in Beijing. Switzerland Novartis joint ventures with Beijing Pharmaceutical Group Co., Ltd and Beijing Zizhu Pharmaceutical Co., Ltd with the equity ratio of Chinese parties to foreign parties being 50:50 in 1987 and 22:78 in 2000. In September 2005, Beijing Novartis Pharma Co., Ltd was completely held by the foreign party, which thus became a sole proprietorship. The aggression of foreign capital in China pharmaceutical industry sounds the alarm for local companies. If such tendency gets increasingly terrible, the pharmaceutical industry would be occupied by foreign capital sooner or later. Pharmaceutical industry is one of the key industries relied on by the Chinese people. It would beyond our tolerance if foreign capital controls our pill-taking and pharmacy and we will have to obtain their approval for doing such activities. It is not alarmism, and you may realize the influence of foreign capital on drug price. b. Parting and exclusively holding Shanghai Johnson & Johnson (a) Development history of the enterprise. Shanghai Johnson & Johnson Pharmaceuticals, Ltd was jointly established by Johnson & Johnson and Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd in 1995 with the total investment amount of over 41 million US dollars, which was the first pharmaceutical company in China specializing in manufacture of self health care medicine established by Johnson & Johnson, the largest OTC manufacture and sales company in the world. Among 203

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which, Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd contributed about 3.5 million US dollars, holding 10% of the equities of Shanghai Johnson & Johnson Pharmaceuticals, Ltd, while Johnson & Johnson held 90%. In accordance with mutual agreement, Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd dispatched two managerial personnel to Shanghai Johnson & Johnson Pharmaceuticals, Ltd, one of whom was the general manager in charge of manufacture in Shanghai Johnson & Johnson Pharmaceuticals, Ltd, and the other was the president of the trade union in Shanghai Johnson & Johnson Pharmaceuticals, Ltd. The plant of the company is located in Minhang Economic and Technological Development Zone, Shanghai. It is the manufacturing base that complied with GMP with two production lines of liquid preparation and solid preparation reaching advanced international standards, producing high quality OTC and health care food. At present, it specially produces and sells the products of cold series, antipyretic and analgesia series, child digestion series, allergic rhinitis series and healthy food series. (b) Business performance Shanghai Johnson & Johnson Pharmaceuticals, Ltd has been deficit since its establishment for ten years. The pure annual investment to Chinese market by Shanghai Johnson & Johnson Pharmaceuticals, Ltd is at least 60/70 million RMB to 100 million RMB (excluding asset contribution and advertisement input, etc). Same as other joint ventures, the limitation of sales policy brings meager profits and even no profit to many commercial corporations which operate products of Johnson & Johnson, affecting their sales enthusiasm; in particular, with respect of new distributors of products of Johnson & Johnson, such policy may bring them with no profit. Knowing the impossibilities but persevering and such preserving is just auxiliary business as a distribution channels station. If it continues this way, the marketing of products of Johnson & Johnson will definitely be affected. (c) Break of the ten-year’s marriage resulting in a turn from a joint venture to a sole proprietorship. Shanghai Pharmaceutical Group (Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd is a subsidiary of Shanghai Pharmaceutical Group), the Chinese partner of Shanghai Johnson & Johnson Pharmaceuticals, Ltd, wholly assigned its 10% equities in Shanghai Johnson & 204

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Johnson Pharmaceuticals, Ltd to Johnson & Johnson in March, 2005, which resulted in the termination of ten years’ Sino-foreign joint venture, and Shanghai Johnson & Johnson Pharmaceuticals, Ltd duly became a sole proprietorship. The equity assignment by Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd is closely related to the successive performance deficit of Shanghai Johnson & Johnson Pharmaceuticals Ltd. Although Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd could draw 1% from the annual sales in return since the establishment of Shanghai Johnson & Johnson Pharmaceuticals Ltd, because of the whole corporate deficit, the actual capital source is absolutely the shareholders’ investment. However, the existing shareholders are just Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd and Johnson & Johnson. It is obvious that Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd has to make up the deficit by its own capital in the end. The withdrawal of Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd is resulted not only from the deficit of Shanghai Johnson & Johnson Pharmaceuticals Ltd but also from the entire listing of Shanghai Pharmaceutical Group, parent company of Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd. The withdrawal is the primary asset stripping mainly for the overseas entire listing plan of Shanghai Pharmaceutical Group. In fact, since CWGC, the largest shareholder of Shanghai Pharmaceutical Group, acquired 40% equities of Shanghai Pharmaceutical Group by way of equity transfer and capital increment in August, 2002, CWGC has always prepared for the entire listing of Shanghai Pharmaceutical Group. Thus, it can be believed that the withdrawal from Shanghai Johnson & Johnson Pharmaceuticals Ltd stands for the listing of Shanghai Pharmaceutical Group having been moved forward substantially. For the purpose of the entire listing of Shanghai Pharmaceutical Group, Shanghai Pharmaceutical Group begins to assign all the capital invested overseas by its 13 subsidiaries including Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd. The withdrawal of Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd is also anticipated by the foreign partner (i.e. Johnson & Johnson). Joint venture means sharing profits and losses, while sole proprietorship means exclusively enjoying profits and outcomes. When it was wholly owned by Johnson & Johnson in 2005, the sales revenues of Shanghai Johnson & Johnson Pharmaceuticals, Ltd ranked the 38th of the top 50 enterprises in the chemicals preparation industry in China, with annual sales amount of 358 million

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RMB. In the same year, Shanghai Johnson & Johnson Pharmaceuticals, Ltd decided to found its own R&D center in Shanghai, which is the third time that a transnational pharmaceutical giant decided to found its own R&D center in China, following Roche and Pfizer. These facts prove that Johnson & Johnson think highly of Shanghai Johnson & Johnson Pharmaceuticals, Ltd. The successive deficit of the pharmaceutical joint ventures aiming at squeezing out the Chinese partner is likely to be the first step of Johnson & Johnson’s investment strategy in China. Actually, the “divorce” between the two parties is the inevitable result since the time of “marriage”. At that time, the ‘couple’ is in different conditions. Johnson & Johnson is one of the top 500 enterprises in the world, and ranks top in global pharmaceutical industry, while Shanghai Pharmaceuticals, Ltd is far away from top 500 enterprises in the world. The reason why Johnson & Johnson chose to cooperate with Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd was mainly the influence of policies at that time. Subject to certain regulations, foreign pharmaceutical enterprises should not establish sole proprietorships in China, that is, if it wanted to enter into Chinese market, it shall cooperate with a Chinese partner. Therefore, Johnson & Johnson and Shanghai No.1 Biochemical & Pharmaceutical Co., Ltd began such an impure “marriage”. With China’s relaxation of the restrictions to foreign enterprises, foreign enterprises are surely prone to get rid of the Chinese partner for the purpose to be a sole proprietorship. c. Expanding the market to annex Beijing Dabao (a) Former prime Dabao, as a national brand, was once prosperous incomparably in domestic daily health market, and even the international giant, such as P&G and L’Oreal, could not underestimate it. Beijing Dabao was formerly known as Beijing Sanlu Factory which was a state-owned welfare enterprise. In 1990, Beijing Sanlu Factory developed unsmoothly with a bank deposit of only 7,000 RMB, being unable to pay the wages of the employees. Du Bin, manager of the Beijing Rubber and Hardware Factory, was appointed at that critical and difficult moment. Du Bin, famous for his keen determination and innovation in Dabao, made drastic reform in financing, R&D, sales and other aspects. In the first year of his appointment, the competitive product of Dabao (i.e., SOD Moisturizer) went to the market.

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The advertisement of “Dabao, see you everyday” appeared in CCTV for the first time in 1993. From then on, Dabao was remembered by more and more Chinese people. From that year on, the economic benefits of Beijing Sanlu Factory began to increase sharply for successive years. In that current year, the employees obtained 150 RMB of bonus each for the first time. Since then, Beijing Dabao began to expand rapidly. It is known that, the sales amount of Dabao SOD Moisturizer occupied over 80% of that of more than 80 types of Dabao products. Dabao, with the impression of cheap and sufficient, was the market champion of the skin care products for 8 successive years from the year 1997. As shown in the survey on the most competitive brands of 2003 in China jointly issued by V-Marketing and a famous domestic professional survey institution, the market share of Dabao was 17.79%, far more than its competitors in the moisturizer industry in 2003. Beijing Sanlu Factory adopted joint-stock system reform in 2002, turning from a state-owned company to a joint-stock company with the state holding 83% and employees holding 17%. Until then, Beijing Sanlu Factory was not renamed as Beijing Dabao Cosmetics Co., Ltd. (b) Development bottleneck However, similar to the majority of domestic popular daily chemical enterprises, Dabao began to suffer a development bottleneck. “The development speed of Dabao slowed down since the year 2003.” said an insider who was familiar with Dabao. The survey on the most competitive brands of 2003 in China showed that the development index of Dabao was not high, but far lower than that of TJOY and MAXAM in 2003. The weakness of Dabao was mainly reflected in marketing and new product development. It is known that, in recent years, the annual sales amount of Dabao was keeping around 800 million RMB. Comparing with the development speed of Chinese cosmetic industry being nearly 20%, it seemed to be incapable to increase. On the other hand, although Dabao SOD Moisturizer was the competitive products of Dabao, there were merely influential products appearing thereafter. In addition, Dabao products were sold in the lower-income market all the times, and could not go to the intermediate skin care market occupied by joint venture brands of the 207

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transnational cosmetic companies, and were unable to rock the high ranged skin care products with imported brands flooding the entire market. The sales amount of Dabao was 780 million RMB in 2005, ranking the first in that of domestic skin care products. However, comparing with Chinese cosmetic industry having a total sales amount of 70 billion RMB, Dabao only had 1% of the market share. (c) Facing Merger and Acquisition On July 30, 2008, the acquisition of Dabao by Johnson & Johnson was approved by all the relevant competent government departments, and Dabao Cosmetic Co., Ltd became a wholly-owned subsidiary of Johnson & Johnson (China) Co., Ltd. Regarding the previous fashionable Chinese cosmetic brand, the memory in Beijing people, it is still premature to tell the direction in which it will go after the acquisition. With the deepening openness degree of Chinese market, more and more foreign enterprises flooded into and gradually occupied the Chinese market. In late 1980s and early 1990s, the foreign giants, P&G, Unilever and Henkel, went into Chinese market by way of joint venture because of the current policies. During this joint venture revolution, almost all domestic brands assigned their own brands and equipments to foreign enterprises, and held less than 50% of the equities. During that period, the domestic daily care chemical industry became a negative example of opening to corporate foreign capital. As the market position of most domestic brands were promptly replaced by similar brands of foreign capital after establishing joint ventures, or under “snow stratification”, many domestic brands automatically withdrew from the market after market shrink. Expanding its scale through merger and acquisition, enhancing the exclusiveness of the brand establishment, enlarging the channel scale by merger and acquisition, richening product lines and reducing risk would be the competitive strategies of daily care chemical fast moving consumer goods. Merger and acquisition quickened industry shuffling, and the merger of Dabao by Johnson & Johnson was just a confirmation thereof. The first step carried out by Johnson & Johnson to Dabao after merger and acquisition was materially adjusting its managers. Du Bin, former Chairman of Dabao (Chairman and General Manger) dismissed, replaced by Hu Meihua, Financial Assistant Manager of Johnson & Johnson in Chinese market. In respect of products, Johnson & Johnson only increased advertisement input and brand promotion of Dabao. The TV advertisement frequency of SOD Moisturizer increased, and other products were more frequently 208

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advertised. As it were, with the participation of Dabao, the market share of Johnson & Johnson in the daily chemical field increased significantly.

C. Market monopoly war Band-aid is the magic weapon for the prosperity of Johnson & Johnson. Let’s take Band-aid as an example to analyze the monopoly war of Johnson & Johnson in China. The woundplast market in China is held by Band-aid of Johnson & Johnson all the time, occupying nearly 30% of the market share, standing in the first place every year. People replaced the name of woundplast by Band-aid in their daily life. While, there was a competitive product, Yunnan Baiyao Woundplast, in 2006. Yunnan Baiyao Group entered into a cooperative agreement with Alltracel (an Irish pharmaceutical and technical company) in 2005 to introduce advanced hemostasis technology. Subject to the Agreement, Alltracel should provide medicinal materials and Yunnan Baiyao Group should manufacture woundplast in local China. Through this cooperation, Yunnan Baiyao Woundplast changed into the medical apparatus and instruments from the original drugs, and entered into supermarkets and other retailing channels, just like Band-aid, and competed with Band-aid and similar woundplast products. Facing with such a powerful competitor, Johnson & Johnson acted correspondingly to bring all the Band-aid manufacture business in Japan into Shanghai Johnson & Johnson Pharmaceuticals, Ltd. The transfer of manufacturing base realized local manufacture of Band-aid products which further reduced the production cost and improved the competitiveness. In respect of marketing, with the help of the current Olympic Games, Band-aid formally signed a contract with Beijing Organizing Committee for Olympic Games to join the Olympic marketing troops, and promoted a series of public benefit activities, such as “Johnson & Johnson Band-aid accompanying you to learn Olympic”, to find the potential consumers in 2006. In 2007, Band-aid again increased its advertisement force by inviting Liu Wei, a Men’s Basketball player, to promote its influence. As it were, Johnson & Johnson was determined to defend its leading position in China’s woundplast market.

D. Advertisement marketing war Modern Marketing thinks that, market share of product relies on the composition of its 209

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commodity force, distribution force and propagation force. Under the extraordinarily furious market competition, the effect of propagation force is more and more important for the enterprise to keep or even enlarge its market share. While advertisement is absolutely the best propagation force, Johnson & Johnson is rather good at using of advertisements. From the original “Inborn and of Johnson & Johnson” to current “Born for Love”, Johnson & Johnson penetrates itself into the popular sentiments by advertisement effect. Differently from the advertisement strategy of other transnational company, Johnson & Johnson neither spends a huge amount of money to employ super star as its spokesman nor invest a huge amount to create special effect. The advertisement of Johnson & Johnson is much likely the public service advertisement. From “Born for Love” to the advertising short film of sponsoring Olympic Games - “Applausing for mom’s Love”, there are warm and love everywhere in the advertisement. Comparing with commercial advertisement, the timeliness and sociality of public service advertisement are full of human kindness, which unconsciously influences human behavior and concept at the time of being discussed. At the current circumstance that commercial advertisement floods into human life, much audience discriminate against TV commercial advertisement, while most of the public service advertisements with the help of its special features and orientation are supported and affirmed by the public, which is extremely precious. Differently from direct adverting of enterprise by the commercial advertisement, the public service advertisement makes the public accept the enterprise by conveying a kind of warmness. The commercial advertisement costs a lot to make commercial advertisement, and just improves the popularity of the enterprises without producing much social effects. However, the public service advertisement expresses the social responsibility of enterprises and improves the popularity and honors of enterprises as well, resulting in the favorable image of enterprises in the public. In respect of enterprises, they may conduct more things with less money. Generally, it is worth much more to make an excellent public service advertisement than to spend huge amounts of money in making image advertisement in the media. An excellent public service advertisement can bring expectant propagation effect. Johnson & Johnson emphasizes on caring the society and providing feedback to society. With the help of favorable public relation strategy, Johnson & Johnson sets up a favorable image in the public mind. It is undoubted that Johnson & Johnson gains a complete victory 210

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in the advertisement war.

E. Price war Medicine plays an important role in people’s daily life, and the problems of difficulty in seeking medical advice and being expensive to see a doctor are age-old in China. In recent years, the disclosed rampant commercial bribery criminal activities in the medicine trading fields make people see clearly how the drug price is raised purposely. In particular, pharmaceutical companies instigates doctors to use the expensive drugs when giving prescription drugs to patients by bribing hospital and doctors, which results in high drug prices. It cannot be denied that the transnational companies teach Chinese enterprises how to operate, make many Chinese enterprises get aware of modern enterprise management system and understand the market economic operation mechanism, thus to change the passive condition of “waiting, relying on and asking for” under the planned economy. However, we shall see that, in case of conflict between economic profits and commercial ethics, many transnational companies chose to betray. Compromise to hidden rules for profit is regardless of domestic or overseas enterprises, and transnational companies are no exception. Today when most financially successful pharmaceutical companies in China are involved in foreign capital or are directly held by foreign capital or even sole proprietorships set by foreign capital, foreign capital’s influences on drug price and people’s medical insurance business are increasingly huge. In such circumstance, the formulation of industrial regulation on transparent medicine price is extremely urgent.

F. Sounding alarm Since the reform and opening, the vigorously introduction of foreign capital promote the rapid development of Chinese economy, meanwhile, the over competition in introducing foreign capital damages China’s benefits received. Governmental departments at all levels “kowtow” to foreign capital for favorable performance. Once a foreign enterprise intends to invest in any Chinese enterprise, there tends to be strong competition among regions. One grants tax exemption for 3 years and the other grants 5 years, which hands over all the benefits received of host country to foreign enterprises. However, from another aspect, Johnson & Johnson’s entry into Chinese market brings 211

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competitive pressure to domestic brands, which absolutely urges them to research and develop new products, improve company’s performance and provide better service for the purpose of occupying certain market share and compete with those foreign brands. In respect of developing countries, the increased controlling rate of Chinese market by foreign capital means the survival space of domestic company is relatively narrowed and becomes the strong competition and obstacle to the development of domestic companies. According to the survey of 12,400 enterprises in 120 cities of China by the World Bank, the rate of return on investment of foreign enterprises in China reached 22% in 2006, 3% higher than that of private enterprises. It should be noted that, according to the survey by the Tax Administration, the average tax bearing (in the proportion of sales) of foreign capital is 11-12%, lower than that of private enterprises (private enterprises enjoy no tax preference, but have much tax evasion), and half of that of state-owned enterprises, thus the “high” effect is not worth flaunting. In the 21st century, China realizes its commitment to WTO by substantially relaxing certain restrictions on investment in China to foreign enterprises, such as shareholding ratio, transferring technology and other additional conditions. In addition, the increasingly openness of the capital market brings much convenience to the merger and acquisition of important Chinese industries and enterprises by foreign capital. As stated in various report by the media, the merger and acquisition of important Chinese enterprises by foreign capital has become an increasingly vital method to its expansion and extension in China. The swallowing of Chinese enterprises by Johnson & Johnson and the invasion to Chinese capital is only a strategy of foreign capital in the war of partitioning Chinese market. The enormous strength of foreign capital could not be ignored for it is intensifying its control over important Chinese enterprises and bringing long-term threat to Chinese economic security. If Chinese enterprises can meet the challenge by continuously enhancing their own competitiveness, they may avoid the merger and acquisition. Therefore, the domestic enterprises must continuously promote their own competitiveness by innovation and making their products remain invincible in the vast Chinese market.

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Chapter XII Coca-Cola: Different Fate due to Different Overall Arrangement between China and India China and India, respectively analogized as the “Dragon” and “Elephant” of Asia, are two developing countries keeping pace with each other, which attract world-renowned companies, including Coca-Cola, by the breadth of their market, the internal demand as well as the openness of government. We can get a glimpse of Coca-Cola’s Asian strategy by its layout in China and India. And we can also enjoy the magic of capital operation occurred by the difference between the two markets.

A. Unique Coca-Cola The Coca-Cola Company, founded in 1892 and currently headquartered in Atlanta, Georgia, USA, was the world’s largest beverage company. The company accounts for 48% of market share worldwide and owns two the the top three beverage varieties in the world. With more than 20 billion US dollars of operating revenues and more than 70 billion US dollars of brand value in 2001, Coca-cola is the first beverage brand in the world. Coca-Cola, owning 50% of market share, has a dominant position in Europe; and it controls 80% of sales in Japan. In the company’s total profits in 1990, the profits from Japan, Europe and other international markets respectively accounted for 21%, 33% and 26%. The Coca-Cola Company has many brands and products, such as Sprite, Fanta, Diet Cola, Qoo, Smart, Modern Tea Workshop, Sensation, Nestea, etc, but the most classic of it is undoubtedly Coca-Cola, a founding product of the company. (A) The unique corporate culture of Coca-Cola For over a hundred years, while promoting the global strategy, Coca-Cola has formed the core values of corporate citizenship. Coca-Cola Company has a clear long-term goal, i.e., each business unit of Coca-Cola could become a local model corporate citizenship and everyone within its business scope could benefit from Coca-Cola’s business. For Coca-Cola, this is definitely not an empty slogan. The goal has penetrated into various activities in each business field of Coca-Cola Company.

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Due to the far-reaching historical connection between China and Coca-Cola Company, China becomes a model naturally where the Coca-Cola System can fulfill its responsibility as a model corporate citizenship. Over the past 20 years after Coca-Cola return to China, Coca-Cola has brought and carried forward the core values of model corporate citizenship in China. Along with the sustainable development of Coca-Cola business in China, the Coca-Cola System (China) spares no effort to join various social welfare activities and strives to fulfill its responsibility as a corporate citizenship. Beijing Temple of Heaven attracted numerous global attentions once again on August 3, 2003. Beijing Olympic Organizing Committee held a grand ceremony directed by Zhang Yimou for the remarkable new emblem of the Beijing 2008 Olympic Games. One million beautiful commemorative cans of Coca-Cola on limited edition printed with new emblem of Olympic Games were also officially marketed on the same day. Therefore, the Coca-Cola Company has become the first company among the top sponsors of the Beijing Olympics, which was lucky enough to be authorized to use the new emblem of Olympic Games. (B) The unique utilization of talents in Coca-Cola Company The Coca-Cola Company proposes the localization thought of THINK LOCAL ， ACT LOCAL. Coca-Cola is not only a company creating brand, but also a base for talents’ training and practice. It makes the best use of its employees by seeking to create all the conditions for the employees, develop employees’ specialties, cultivate employees’ skills and explore the potential of employees. It is the talents trained by Coca-Cola Company that make its brand a success. Therefore, we can say that it is the unique and effective talent strategy that makes Coca-Cola obtain the outstanding achievement and become a global brand company. In the special market of China, Coca-Cola Company has to be more careful to formulate and select the talents programs, and strive to explore all kinds of local talents so as to truly achieve the development strategy of taking root in China. In China, more than 99% of the employees in the Coca-Cola System are employees with Chinese nationality; in Coca-Cola (Beijing), all the employees are from Mainland China except that the general manager and chief financial officer are respectively from China Taiwan and Australia. The communication language of all managers is not only English but also Chinese, the foreign president of Coca-Cola China Limited can even make dialogues and jokes in fluent Chinese, and many foreign colleagues can also speak Cantonese and other dialects. All the corresponding 214

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documents are made in Chinese and English. All the employees specifically operating in the 23 bottling plants or working in the offices of Coca-Cola China Limited are from China. (C) The unique business philosophy of Coca-Cola Company Since Coca-Cola Company has been so successful, what can the modern business learn from its experiences? Broadly speaking, this experience is both simple and obvious. Here is part of successful and time-tested management experience selected from the development history of Coca-Cola Company. a. Selling high quality products The products do not have to speak or fly, but must to be equipped with one kind of useful feature to make them widely accepted by people. When people get used to the taste of Coca-Cola, they will find it very tasty and develop a hobby therefore. Coca-Cola makes people nose with a kind of itchy feeling, quenches their thirst and brings some effect of caffeine. Some people think that it can treat headaches, nausea and stomach pain and so on. b. Believing in their own products Let the products establish a noble image and make the career associated with the products a sacred profession. Let the staffs believe that the quality of the products is world-class, and they are working for the best company. And salesmen should have the ability of missionaries, but not salesmen who just want to get paid. c. Creating a sense of mystery Although creating a mysterious atmosphere goes against morality, it promotes the sales of products. Lately a person in charge of Coca-Cola Company admits that the secret recipe does not make much sense for them, and the real secret of success lies in the impact that the trademark of this product has made on the multi-world. However, the secret of that recipe, i.e., the seven well-known tastes are indeed once an important reason for the attraction of customers.

B. Comparison between the two major markets of India and China (A) India: a kind of magic power that haunting Coca-Cola As the sales growth in Western markets slowed down, the beverage giant Coca-Cola has 215

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been targeting India, which has more than 1 billion potential beverage consumers due to its vast potential rural market and urban consumers. The Coca-Cola Company believes that there is a huge space for growth in the consumption in India: India’s annual per capita consumption of carbonated drinks now is 10 bottles, which is only 1/3 of the average consumption level in Asia and makes India one of the countries with lowest consumption levels of such drinks in world. Nevertheless, as Asia’s third-largest economic entity, India has been maintaining an economic growth rate of about 8% in recent years. The huge market potential is a crucial attraction to Coca-Cola. Furthermore, the government of India is committed to reform and opening up in recent years, and the speed of opening up continues to accelerate, which provides a good opportunity for Coca-Cola. In addition, according to the conclusions based on market assessment, the carbonated drinks market is currently estimated to be 1.5 billion US dollars and still increases by the rate of 15% per year. Moreover, by the stimulation of several failures, Coca-Cola Company, which has got courteous treatment in other countries, decides to change its situation and achieve success in India. a. Entering into the Indian market for the first time The Coca-Cola Company entered into the Indian market for the first time in 1973, and suffered a waterloo after only four years’ development in 1977. At that time, the government of Indian required Coca-Cola Company to disclose its basic solution recipe with predictable results. As a result, Coca-Cola Company together with IBM dropped out of the Indian market with a kind of tragically heroic spirit. b. Seeking to regain the lost territory In 1993, Coca-Cola adopted a lot of marketing strategies, such as civilized strategy, and committed to the localization process in order to expand its market share regardless of the cost and expenses. Coca-Cola Company had invested as much as 1 billion US dollars in India in the past over 10 years, but it didn’t profit until recent years. The results were not so significant, and points of sale for Coca-Cola in India had not reached 900,000 before 2002. c. Being questioned once again due to the pesticide event In 2003, the first public survey conducted by the Centre for Science and Environment of 216

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India showed that the pesticide residues in some soft drinks produced and sold in India by Coca-Cola Company were out of limits, and later a quality test released by the Centre for Science and Environment in New Delhi, India showed that the pesticide content in soft drink products produced and sold by Coca-Cola Company was 30 times higher than that specified by the European Union. The center also tested similar products in the United States, but found no similar ingredients. In the same year, the Indian health authorities warned the public not to drink Coca-Cola with the reason that Coca-Cola contained contaminated ingredients; on December 26, 2003, the local judge ruled against Coca-Cola with the sentence reason that Coca-Cola indiscriminately used groundwater in the local, and the local rural women even protested in the enterprises’ gateway. On February 17, 2004, the organization of local women sued the transnational companies in the name of protecting national interest, and the Coca-Cola plants were compelled to be shut down by the local government. In response to this crisis, Coca-Cola Company immediately denied the allegation of “excessive harmful substances”, and held a press conference together with its competitor Pepsi-Cola without precedent. Both Coca-Cola and Pepsi-Cola held the opinion that they had been using local groundwater for production, which proved that if the harmful substance contained in the drinks was out of limits, the water source of India should also be responsible for the result. The government of Indian had set no quality standard for soft drinks. By virtue of these measures and reasons, Coca-Cola Company finally got out of that crisis, but it had also cast a shadow over the mind of Indians. d. The “poison” event exploded by Indian against Coca-Cola Coca-Cola Company has always believed that India is a very potential market, and has thus paid a considerable degree of attention into it. However, in 2006, due to the “pesticide” quagmire, as well as the prior charge of contaminated water source, the sales of Coca-Cola in India have fallen sharply. (B) China - the second largest market for Coca- Cola In March 2010, 40,000 employees of Coca-Cola System (China) are thrilled by the good news that Coca-Cola Greater China Region and Bottling System won the company’s highest honor- Woodruff Cup and became the best performing operating market in the global Coca-Cola System in 2009.

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This award affirmed the operation achievements of Coca-Cola System (China) in 2009, including the new increase of 8 salesmen, 800 points of sales and 400 cold drink equipments annual average daily. Currently, Coca-Cola Greater China Region has become the world’s fastest-growing Coca-Cola market and achieved the double-digit growth by 8 consecutive years. In China, “Coca-Cola” is the most popular brand of cola-type beverages, while the sales of “Sprite” increased by 18% in 2009, ranking the first in the sales market of carbonated soft drinks. In the non-carbonated beverage market, “Minute Maid” is the largest brand for the sales in juice drink market. In fact, early in the previous century, Coca-Cola had been available in Asia, which was produced in the Philippines for the first time and shipped to China for sale in Shanghai and other cities. Coca-Cola officially entered into China in 1927, and began bottling production in Tianjin, Shanghai, Qingdao and Guangzhou successively. This shows that Coca-Cola Company has more inherent advantages in China than in India. In 1948, Shanghai became an important market outside the United States where the first annual sales volume of Coca-cola was more than 1 million cases. In 1949, the new China was founded, and Coca-Cola stopped its business in China. On January 1, 1979, the day when China and the United States established diplomatic relation, Coca-Cola, known as the “Western capitalist way of life”, returned to Chinese market, becoming the first international consumer products companies entering into China after China carried out the reform and opening-up policy. The survey conducted by CCTV in 2002 showed that the market share, brand loyalty and preference of Coca-Cola were all ahead of other beverages, making Coca-Cola the most popular carbonated drink. When Coca-Cola Company suffered a waterloo in India, Coca-Cola (China) Limited stated that the beverages produced by Coca-Cola in China were all produced by using the original water sources. Such water met with national drinking water standards for tap water, and was finally made into pure water that consumers can drink at ease after 6 purification processes such as activated carbon and reverse osmosis, etc. Just by this statement, Coca-Cola Company eliminated the adverse effects of failure in Indian on the Chinese market, and Coca-Cola was still the first carbonated beverage in Chinese market. 218

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(C) The reasons for the different fates of China and India a. The Reasons for the good friendship between Coca-Cola and China (a) The localization strategy of Coca-Cola The thought of Chinese people that “first impressions are half the battle” virtually played an important role in Coca-Cola’s original success in China. However, nowadays, faced with the push into Chinese market by other powerful foreign drinks, as well as the sortie by the mushrooming local beverage companies with the slogan of national characteristics, the situation of Coca-Cola was undoubtedly not like what it used to be. As a result, Coca-Cola Company established its own position as an omnibearing beverage company and made great efforts in terms of regional development, establishment of bottling plants, close cooperation with several partners, as well as the promotion for new product, employment of local managers, and folk-custom and localization in the advertising content, etc. i. Catering to the tastes of Chinese people When Coca-Cola Company and Nestle Company jointly established BPW (Beverage Partners worldwide), the first product promoted by BPW was Nestle tea in PET bottles. The tea culture in China is so rich that the consumers naturally believe that, the more localized the tea drinks, the better they are. According to the market survey, it can be seen that Chinese consumers also prefer the taste of green tea. This time, Coca-Cola Company introduced the product of Green Tea based on original Nestle Black Tea and Ice Pole, which was the product implemented and promoted in local. This is to cater to the market. This is to cater to consumers. No matter how best-selling and influential your products are in the international market, it is rather difficult to be successful without considerations of local market conditions and consumer preferences. ⅱ.Catering to the culture of Chinese people Coca-Cola Company does not necessarily believe in superstars. The implementation of localization continues to be strengthened in recent advertisements. Whether it is Liu Xiang or Yao Ming in China, the advertising effect they brought overshadowed the limelight of international sports and entertainment superstars such as Beckham, Janet Jackson, etc. Coca-Cola Company makes good use of the cute image, A Fu, which reflects Chinese folk 219

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and is posted at the gates on New Year and Spring Festival, who can refuse such deep feeling of local culture? ⅲ.Knowing your enemy and knowing yourself Although Coca-Cola Company is a large international company, it is also concerned about its local competitors, carefully studies the competitiveness of local and behavior, and pays much attention to Uni-President Company and Tingyi (Ting Hsin) Company in the industry of fruit juice drinks, Wahaha and Robust in the industry of purified water, as well as some other domestic beverage companies. This practice is rare for many other transnational companies, whose market researches contain nothing about domestic enterprises. ⅳ. Strategic cooperation with local enterprises In April, 2005, Coca-Cola China Limited cooperated with the9 Online Gaming Company. The cooperation between Coca-Cola China Limited and the9 Online Gaming Company is not only cooperation between two companies, but also cooperation for market development and to meet the demand of consumers. As a traditional industry, it is normal for Coca-Cola Company to open internet bars which are the modern channels and get close to the most dynamic young consumers by the resources of emerging industry. (b) Policy of control through conciliation conducted by the government of China After the Queen of England visited China for the first time, it was customary that CCTV would exchange the documentary with BBC, and that documentary was sponsored by the Coca-Cola Company, by which we can conclude that the Coca-Cola Company began to get close to the Government of China. Later, Coca-Cola Company established a joint venture bottling company together with COFCO, which is the largest Import and Export Company for oil and food in China, and a powerful food manufacturer, backed by the Ministry of Finance. (c) Unlike the government of India which has the Opposition Party and Left Party, the government of China is a one-party government, which conducted the policy of reform and opening up and held the liberal attitude toward foreign capital for a long term. (d) The one who gets the popular support gets the market Since the populace of China always believes that imported products are better than domestic 220

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products and envies the life style of teenix, Coca-Cola is naturally widely popular in China when it enters into the Chinese market with the label of American style. b. The reasons for disharmony between Coca-Cola and India (a) Cultural Psychology The strategy of India has always been the boycott by the populace together with the government. As a brand which was almost developed with the history of United States, Coca-Cola reflects the complex and distinctive American culture, with the only difference that it is more hidden and contains more subtle effects. So, after Coca-Cola entered into the Indian market, its culture affected Indian at the same time. India used to be a British colony, which still made Indian feel painful, it was natural that the Indian had a feeling of rejection towards Western countries. The impact between the national culture of India under such conditions and the American culture, which could be seen as aggression on the cultural psychology, was an important reason why Coca-Cola incurred a boycott. Therefore, the kids in India were taught not to drink Coke, which made the consumers of this generation deeply affected by this view and have a bad impression of Coca-Cola in their childhood, and which was not conducive to the long-term development of Coca-Cola. In addition, due to the long-term contradiction existing between radicals and conservatives in the government of India, the implementation effect of the policy of opening up was not so obvious, while some other parties were hostile to overseas-funded enterprises, and the bad treatments to Coca-Cola occurred in those areas dominated by these parties for the most part. The government’s attitude was so tough that it made Coca-Cola who had unique skills finally get into trouble. (b) Conflict of interests During the performance of liberalized reform, the government of India always supported its national industries, and prevented foreign investments from excessive expansion, and sometimes even took some rather drastic measures. Talking about the current soft drinks market in India, the domestic market in India has been divided up by the two magnates (Coca-Cola and Pepsi) after Coca-Cola re-entered into the Indian market in 1993, and the market share of the two companies in India is up to over 75%, while some previously well-known domestic brands in India gradually disappear In the era of globalization, it is undeniable that the status of transnational companies becomes more and more prominent in 221

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the world economy and even the political system. However, the pressure of transnational companies is increasing with the upgrade of their status at the same time. In India, the foreign investments doubled in the past three years and reached up to 6 billion US dollars. Some optimistic projections estimate that this figure will still double by 2009, which is good news for the transnational companies. These data reflect that the hostility against foreign investors has greatly diminished with the openness of economy in those countries that have a strong feeling of nationalism such as India. However, transnational companies are still prone to get into trouble accidentally. This reality, which could be seen as aggression on the interests, has begun to make the Indian government worried. (c) A drowning man will clutch at a straw People might think that the attitude of India was too tough in the event for requiring Coca-Cola to disclose its secret recipe, which had a history of more than 120 years. However, the attitude of Coca-Cola in the “poison Coke” event was also blameful for asking the American government for help, causing the “poison Coke” event, which was only a commercial event, a diplomatic event. The blame coming from American authorities deepened the hatred of Indian towards Coca-Cola, which proved the measures took by Coca-Cola to be unwise. (d) Self-defeating with the advertising effect The universal localization strategy also has the chance to encounter dilemma. All the Indian people love football and movies. Indian companies spend 50 million to 75 million US dollars each year for the sponsorship of Football League, while about 13 million Indians want to watch movies every day. As the temperature is relatively high in India and many consumers prefer iced drinks, marketing strategy of Coca-Cola is dedicated to expanding the concept of “cool” accordingly by making a series of advertisements for it together with films on television, with the Coca-Cola’s brand positioning on “iced drinks”. The superstar, wearing native clothing, passes the concept of “Thanda” (means cold in Indian) to every region by local language through television. However, the Indians did not seem to care about what Coca-Cola had done, which was probably not the things Coca-Cola had expected. The reason was that Coca-Cola blindly hoped to open the Indian market and made self-disparagement, emphasizing that people can enjoy a can of Coke by spending just 5 rupees, which made Coca-Cola too “rustic” for its popularity in the villages and the urban people began to “despise” it. After all, the 222

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consumption level of rural areas was limited and the consumer market for Coca-Cola should be cities.

C. The competition between Coca-Cola and Pepsi (A) The competition concerning advertising In 1960, Pepsi entrusted BBDO to manage its advertising business. After an analysis concerning the composition of consumers and the changes of consumer psychology, BBDO made efforts to portray Pepsi as drinks for young people. Meanwhile, Coca-Cola still maintained its “traditional” image, and overwhelmed Pepsi by the proportion of 5:1, which had been reduced to 2:1 already 10 years later. Since then, Pepsi put great emphasis on the characteristics to attract the attention of young people in its advertising and marketing, and introduced a unique music marketing strategy in the advertisements. Pepsi made a very deep impression to people in 1998 by the blue storm of “dare for more” starred by Martin, Faye Wong and Aaron Kwok in its centenary, making the blue cans a symbol of young fashion. Up till now, Pepsi’s music strategy launches many theme activities that contain Pepsi music, such as superstars, new stars, music cards, music billboards and auction markets, etc. In contrast, though Coca-Cola seized the characteristic of Chinese local culture, it cannot compare to Pepsi in terms of keeping pace with the time. The advanced concept that young people are the masters who control the future makes Pepsi well-known. (B) The competition concerning India At the end of 1970s, the Indian government announced that if Coca-Cola wanted to distribute and sell its products in India, it should disclose its recipe to the public. However, both parties failed to reach an agreement at last and Coca-Cola dropped out of the Indian market as a result. Pepsi had no secret in recipe, so it took the opportunity to enter into this important market by establishing food processing plants and increasing agricultural export. (C) The competition concerning market The strategy adopted by Pepsi to compete with Coca-Cola for markets is to enter into those markets where Coca-Cola has not yet entered into or failed to enter into. After a thorough investigation and study, Pepsi found that it had chance to succeed in many markets of Soviet 223

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Union, China, Asia and Africa. By this approach, Pepsi can not only avoid its disadvantage occurred due to entering the market after Coca-Cola and lose-lose situation, but also form a monopoly in large areas. Pepsi’s success in the Soviet Union could be said to owe to a special advertising campaign. When the United States exhibition was held in Moscow in 1959, Kent requested the current U.S. Vice President Richard Nixon to “try to make the Soviet leaders drink some Pepsi” using the special relationship between him and Nixon. Khrushchev then raised the Pepsi-Cola with an expression of satisfaction in front of many national and international correspondents and reporters. In 1975, Pepsi-Cola Corporation helped the Soviet Union to sell vodka in exchange for the right of establishing its production plants in the Soviet Union and the monopoly right of sales, and became the first American private enterprise to enter into the market of the Soviet Union. This event immediately caused a sensation in the United States, and each of the major newspapers was reporting this news in headline. In Israel, Coca-Cola took the advantage to set up factories first. However, this caused a boycott from Arab countries. Pepsi immediately gave up the market of Israel, in which Pepsi might not get any benefit, and took the advantage to enter into other markets of Middle East, made its products spread around every corner of the Arabian Sea, and made Pepsi-Cola an Arabic daily vocabulary. (D) The competition concerning sales channels Promotion is a common means that Coca-Cola and Pepsi use to compete for sales channels. Taking the market competition in the market of Chongqing for an example, Coca-Cola has 22,000 sales outlets in Chongqing currently, and plans to increase the number to 30,000 by the end of the year. We are still unable to get the number of Pepsi outlets in Chongqing at present. The sales rebate of Pepsi to retail outlets is 0.8 RMB per bottle currently, and Coca-Cola has increased the rebate to 0.85 RMB per bottle. Coca-Cola is to “offer incentives to Pepsi dealers and finally make them turn to Coca-Cola”. Dealers can get another 0.5 RMB by each bottle of Coca-Cola they sold, and additional 1 RMB as a subsidy for delivery of each bottle of the product. However, the franchised bottling plants of Coca-Cola made Coca-Cola lose in the market of supermarket chain to Pepsi. This was mainly because that bottling plants operated separately with different cost structures and profit levels, which made it difficult to reach a uniform price for the prices of Coke in various regions. Incapacity to convince bottling plants to 224

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reach an agreement was the key reason why Coca-Cola lost to Pepsi in this market. The matter of price also exposed one of Coca-Cola’ weaknesses, that is, Coca-Cola cannot compete with others in price. Because of that, it will be mentioned hereinafter that Coca-Cola acquires bottling plants for the unified management of Coca-Cola Company.

ing the step of “sole proprietorship D. Tak Taking roprietorship”” in China When Coca-Cola first entered into China, China was in the initial phase of development, which made Coca-Cola, as one kind of foreign goods, unacceptable to Chinese people at that time emotionally and ideologically. Before bottling plants of Coca-Cola were built in China, Coca-Cola made sales arrangement to COFCO by the way of consignment since 1979. When Coca-Cola wished to build bottling plant in Shanghai for the first time, it was strongly opposed by the people of Shanghai. Therefore, Coca-cola turned to Beijing as a result. The main memory of most Westerners about China is composed by the “nightmare” concerning joint venture. Transnational companies understand that to establish joint venture with Chinese enterprises is to establish joint venture with government, the biggest customer in this market. This is an art to get permits for entering into Chinese market. The reason why Chinese enterprises are also so willing to cooperate with transnational companies is nothing more than to learn advanced management, techniques and concepts from transnational companies. However, we often forget the fact that things containing core value are often controlled firmly by transnational companies and transnational companies are ready to be tight-lipped long before they come to China. Then, what is the value for transnational companies to cooperate with its Chinese partners? Under the traditional Chinese cultural communication background, it can be said that we are only a group with a series of ad hoc identities, who are the persons to deal with the Chinese government officials, the managers of production line, and the owners of a large distribution network that transnational companies are temporarily unable to encroach on. Once they have the chance, transnational companies are still eager to control these resources by themselves. At the end of 1970s, under the situation that the products of Coca-Cola were prohibited to be sold in the domestic market, but could only be sold to foreign guests by the way of consignment or sold in exchange for foreign exchange certificates, Coca-Cola selected

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COFCO, which had a strong governmental background at that time, as its exclusive agent. At the time between late 1980s and early 1990s, Coca-Cola established joint ventures of Swire Beverages Company and Kerry Beverages Company with Swire Pacific and Kerry Group successively. Coca-Cola Company accounted for 12.5% of the shares in each of the two companies. In April, 2000, COFCO COCA-COLA was established, in which COFCO accounted for 65% of the shares and Coca-Cola accounted for 35%, being the first bottling group holding by China-invested enterprise in the Coca-Cola system. Coca-Cola has 33 bottling plants in China currently, which are the joint ventures established by Coca-Cola with Swire Group, Kerry Group and COFCO respectively. Among the 28 Coca-Cola bottling plants in Chinese Mainland, COFCO has participated in the investment of 17 bottling plants and owned the operating concessions of Coca-Cola in 14 provinces. Kerry Beverages has the controlling interest of 11 bottling plants in 9 provinces. Coca-Cola has invested more than one billion US dollars to establish joint ventures with its three major bottling groups. For the foreign-funded enterprise just like Coca-Cola who wants to enter into the strange Chinese market eagerly, it is wise to establish joint ventures by cooperating with those strong domestic enterprises. To cooperate with its partners who fully understand China’s actual conditions can not only help Coca-Cola bypass various traps in the imperfect market system, and those partners own a very large distribution network, including more than 700 sales offices and more than 7,000 distribution partners. By virtue of such a network, Coca-Cola can sell its products to remote cities without establishing plants in large-scale, which avoids more troubles than “Greenfield Investment”. The cooperative mode Coca-Cola adopted in China was formed: Swire took charge of the Southern, while Kerry and COFCO took charge of the Northern, and then picked up a small local partner accordingly. Taking Swire Guangdong Coca-Cola for an example, Swire took charge of the daily operations and channel management, Coca-Cola and COFCO did not participate in the specific operation while Coca-Cola was responsible for the brand management and COFCO acted as a strategic shareholder. Taking the specific ratio of contributions for Chengdu Coca-Cola Company for an example once again, Chengdu Coca-Cola Company was a joint venture established by Kerry Beverages Company, Chengdu Horizon Group and COFCO COCA-COLA Company with the proportion of shares 60%, 25% and 15% respectively. It can be seen that the model for the companies invested by Coca-Cola in China is to rely on the franchised bottling rights rather than its assets. Coca-Cola Company, the brand owner and the sole supplier of concentrated solution, 226

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controls the cash flow of joint ventures by controlling the supply of concentrated solution, affecting the expenses and costs of advertising, and adjusting sales territories, etc. This mode of operation or investment does well in low-cost expansion and low-risk. The advantages of this model in summary are that the three partners of Coca-Cola have experience in international cooperation, which make them own a high degree of integrity; Coca-Cola is an excellent negotiator among those strategic partners, which makes the local minority shareholders submissive; Coca-Cola will not invest in large scale, and has no need to manage the specific transaction business in each bottling plant or receive dividends from the local partners directly. (A) Kerry dropped out of Coca-Cola On August 29, 2006, Coca-Cola Company announced to purchase the controlling stake of Kerry Beverages Company, a joint venture established by Coca-Cola and Kerry Group for the business of bottling. Coca-Cola Company would take the opportunity to expand its control power over the joint venture business of China. Kerry Group completely dropped out of the related businesses of Coca-Cola by this equity trading arrangement. Coca-Cola announced that it would hold 89.5% of the Kerry Beverages’ shares, and would purchase the remaining 10.5% of the shares at the same price per share plus related interest before the end of 2008. Coca-Cola had voting right and economic right on matters concerning the remaining shares. After completion of the acquisition, the bottling investment group being responsible for Coca-Cola’s global bottling operations would take over the business of Kerry Beverages, and be responsible for the operations of such business, which meant that Coca-Cola would manage and operate directly the business of bottling plant and distribution channels for the first time in 27 years. (B) The shares trading between Coca-Cola and COFCO According to the announcement of China Food Plc, a public company held by COFCO in Hong Kong, COFCO COCA-COLA, a company held by COFCO, sold the shares of 6 bottling plants in Chengdu, Harbin, etc, to Coca-Cola China Industries Limited and bought 40% of the shares in Beijing bottling plants held by Coca-Cola China Industries Limited at the price of 270 million RMB in the meantime. The purpose of the shares transfer is to help the two bottling groups make a better integration of local resources, so that the layout of the bottling system management would be more rational and more efficient. After the shares 227

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transfer, Coca-Cola China Industries Limited would manage the bottling plants located in the provinces in the northeast uniformly, while COFCO Coca-Cola could manage the bottling plants located in Beijing, Hebei province and Shandong province more efficiently and more uniformly. Both COFCO and Coca-Cola have got rid of the scattered pattern of cross-holdings and formed influential market coverage respectively. Coca-Cola chose to give up the controlling right of the dominated Beijing bottling plants, but gained the absolute power of speak over the southwest and northeast markets which were of more growth space. In addition, by the transaction of shares transfer, the shares of Coca-Cola bottling plants were more concentrated, which did good for the unified management and helped to improve internal operations and profitability. (C) Mergers and acquisitions that Coca-Cola intends to make in China Coca-Cola announced to purchase the world’s second largest mineral water producer, Highland Spring, shortly after it acquired Glaceau. Thus, Coca-Cola’s global M & A program had been very clear. The president of China, Paul Etchells, once said that Coca-Cola had been giving close attention to and studying its Chinese market competitors, and Coca-Cola did not rule out to develop its market share in China rapidly by the way of mergers and acquisitions. We can conclude that Coca-Cola intended to be a foreign funded enterprise and gradually get rid of all its Chinese joint venture partners to control the market in China solely.

ought to China? E. What have Coca-Cola br brought (A) Outstanding contributions a. Coca-Cola provided a large number of employment opportunities in China through direct investment in this country. 4,140,000 jobs in China in 1998 had a direct or indirect connection with the production and sales of Coca-Cola, among which, the Coca-Cola system hired 14,000 employees directly, Coca-Cola’s independent suppliers hired 350,000 people, and Coca-Cola’s independent distributors, wholesalers and retailers hired 50,000 employees. b. Coca-Cola had a positive effect on China’s economic gross output 228

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Coca-Cola’s direct fund introduction of 8 billion RMB created an added value of 22 billion RMB indirectly, and made Chinese economy increase by 30 billion RMB in output value by the multiplier effect each year. c. Coca-Cola also contributed to China’s tax revenues In 1998, the producers, managers and marketers of Coca-Cola provided direct and indirect taxes of 1.6 billion RMB. d. Coca-Cola made domestic beverage business have high expectations to the prospects of the industry and stimulated business competition at the same time Many home brands such as Wahaha, Coconut Palm, Jianlibao, Robust, Lulu, etc, have all developed their own businesses to the value of 1 billion RMB or even 2 billion RMB. Although those domestic companies cannot compete with giant transnational companies like Coca-Cola in many aspects, we have to admit that those national companies are growing rapidly after the policy of reform and opening-up and have thus constituted a threat to Coca-Cola to some extent today. e. Coca-Cola let we catch sight of “markets”. Coca-Cola turned those inefficient state-owned enterprises to efficient and successful joint ventures in its bottling plants network in 21 provinces and cities. For example, the 8.16 billion RMB initial capital investment from Coca-Cola in 1998 brought 21.7 billion RMB of added value, and brought a chain expansion effect of increasing demand to other sectors, particularly the areas of transportation, post and telecommunications, coal, electricity, synthetic chemical materials and technical services, and put the development of related industries such as glass, plastic, aluminum cans and sugar, etc, in motion at the same time. f. Coca-Cola taught us how to do marketing Coca-Cola made us understand what brand management is and broke the Chinese old concept of “good product sells itself”, at the same time, which was probably a great breakthrough to the traditional business concept in the mind of Chinese people. We have also learned how to manage the brands, deal with public relations, do media placement, make advertising films, and pay attention to the demands of consumers, etc, of which the techniques we have mastered thoroughly today. g. Coca-Cola taught us the most important management experiences 229

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Although the idea of “People-oriented” was not proposed by Coca-Cola in the first time, Coca-Cola brought this idea into its management philosophy and used it freely, which made Chinese people surprised indeed, and the specific operation of this idea was as follows: regard people as the most important resources, make the most suitable work arrangements based on a combination of factors such as capabilities, strengths, interests, and other psychological conditions of the staff scientifically, and make the best use of enthusiasm, initiative and creativity of employees in work by use of scientific managerial methods, comprehensive human resources development planning and corporate culture, so as to improve efficiency, increase work performance and make the greatest contribution to achieve the company’s developmental goals. Coca-Cola appointed different people in places where the sales network of its products is extended to. The use of local talents without restraint, which enables the local staff to have no worries, grow up with the company and provide long-term services for the company with no doubt, is the real charm of localization. (B) Negative impact a. Coca-Cola is seeking to control of Chinese soft drinks market? As the “leader” of the beverage industry for many years, Coca-Cola has formed a highly astute and rich sense and unique operational experience with respect to all kinds of important events in the field of politics, economy and sports, etc. The most typical example is the memento cans which were in honor of Beijing’s successful bid to the Olympic Games and produced and sold by Coca-Cola on July 13, 2001. In order to make the execution of memento cans fast and effective, Coca-Cola detached elites from various departments for the discussion and planning with respect to the memento cans long ago. After preparations for a long time, the production lines for making memento cans, which were designed to commemorate Beijing’s successful bid to the Olympic Games in the bottling plants in Beijing, started as soon as Juan Antonio Samaranch announced that Beijing would be the host country for 2008 Olympic Games on July 13, and 40,000 boxes of memento cans were sent to each major supermarket and retail outlet the same night when they were produced and taken off the production lines. To make the best use of opportunities does not necessarily have an immediate effect on the market, but will strengthen its position as a leading brand in the relevant regional market 230

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once again. It occupies the minds of consumers with respect to this type of product, and it is difficult for other brands to enter again. Coca-Cola makes its drinks and concentrated solution reach 70% of the market in China, forming a dominant monopoly and achieves a dominant market position by the implementation of this considerable hidden brand monopoly strategy. Such behavior will cause a tremendous impact and damage to China’s national industries, and pose a threat to China’s economic security to some extent. b. The effect on human body caused by Coca-Cola According to the data showed in the food composition table, there is about 89% of water and 11% of sugar in the regular Coke, containing about 11 milligrams phosphorus and 10 milligrams caffeine per 100 grams Coca-Cola with minimal other ingredients. At the beginning, the most important ingredient of Coca-Cola was cocaine. Since cocaine was prohibited from using later, it had to exit from Coca-Cola. And caffeine replaced cocaine as a result. Since caffeine is also addictive, it is one of the reasons why people always like to drink Coca-Cola over the past one hundred years and more. In addition, Coca-Cola made calcium run off faster due to the ingredients of phosphoric acid, refined sugar and other ingredients contained in the liquid. Some studies on human body have confirmed that the amount of cola drink has a correlation with the fracture rate of young girls, and the risk of fracture to drinkers of Coca-Cola in a large amount is five times higher than that to non-drinkers. There are also sufficient research evidences proving that Coca-Cola has a correlation with some dental diseases. Obviously, Coca-Cola is not a kind of beverage that does good to human body in terms of nutrition and health. Since the nutritional status of Chinese people is just so-so, it needs to remind children who are more likely to become addicted to caffeine or become malnourished, and the elderly of whom the nutrient absorption capacities are decreasing with a high prevalence of osteoporosis, and middle-aged women, who should be more concerned about obesity and loss of calcium, to control the cola drinks that has a low nutrient density. Moreover, since cola contains caffeine, people who drink cola regularly may suffer from headaches, irritability, stomach discomfort and other symptoms once they suddenly stop drinking. c. Would Coca-Cola become a kind of culture to you? Someone once said: “To drink some Coca-Cola, eat a Big Mac and watch a Hollywood film, 231

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you can live the life of Americans.” Indeed, Coca-Cola, McDonald as well as Hollywood movies have become the representatives of the U.S. consumerism culture which has a deeper influence on the masses than other forms of culture. The main function of Coca-Cola is to educate and spread American culture around the world while it appears to be aiming at the localization strategy and business objectives. Some commercial activities of transnational companies are simple, some are strategic, and some are subtle. However, the U.S. does have the tendency of cultural invasion. Since the brand of Coca-Cola is a symbol of American consumerism culture, the success of localization achieved by Coca-Cola in the world is essentially a victory of penetration of American culture into different localities all over the world. If only to emphasize the global impact that Coca-Cola has made on economy but ignore the impact it has made on culture, or simply regard the cultural influence as a means of making money, then you are absolutely wrong. This will not be a simple cultural invasion, but rather terrible cultural cleansing. If taking physical dependence on Coca-Cola of people into consideration, I think this may be the most radical form of modern colonialism.

F. The melee of Coke Cokess in China The pattern of China’s beverage industry was once “two giants, three juveniles”, of which the two giants were Coca-Cola and Pepsi and the three juveniles were Jianlibao, Future Cola and Fenhuang Cola. Circumstances changed with the passage of time. The two giants are still strong while the three juveniles have totally different fates respectively, of which Future Cola has grown up, Jianlibao stops its growth after it is incorporated into another company, and Fenhuang Cola becomes weak and trivial increasingly. a. China’s own Cola—Future Cola According to the taste of the Chinese people, Wahaha Company developed a kind of cola carbonated beverage, that is, Future Cola, on the basis of extensive market research, which tastes good with high gas content, has no preservatives, and lives up to modern consumers’ psychology at the same time. Currently, with its unique national characteristics, Future Cola has become a symbol of the happy life of Chinese people. After more than ten years of experiences, Wahaha launched the “Chinese own cola - Wahaha Future Cola” after two years of careful research in 1998, a time when Wahaha thought that it had acquired sufficient weapons to compete with those large foreign brands in the world, and played an active role 232

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in the beverage industry and competed with those international brands as an representative of China’s national industry. Future Cola developed very fast since it was put into production in May, 1998, and its annual production and sales volume are now more than 600,000 tons. Its sales volume is comparable to that of Coca-Cola and Pepsi, which provides numerous national brands with courage and confidence to participate in international competitions. b. A situation of tripartite confrontation with respect to the melee of Coke From the summer of 1998 to the spring of 2006, Future Cola launched many advertising promotions and the progress of market occupation developed rapidly. In the latter half of 2005, the sales of Cola series was 150 million RMB, the products were in short supply throughout the summer. The average market share of Future Cola series has reached 15%, ranking after Coca-Cola and followed by Pepsi-Cola in the provinces of Zhejiang, Anhui, Liaoning, Jilin and Heilongjiang. Meanwhile, the sales of Future Cola are almost equal to that of Coca-Cola in some provinces such as Hunan, showing a tendency to catch up with Coca-Cola. According to the latest news, the monthly order of Future Cola series has reached 200 million RMB, but its actual monthly output is merely 50 million RMB, which makes its products in short supply, lagging far behind the demand. So far, the conditon of domestic coke market is as follows: Coca-Cola continues to hold the first place in the market, but the speed of growth is slowing down; due to the constraints of infrastructure and the needs to improve the environment for foreign investment, Coca-Cola is a potential threat to India, and the nationalist sentiment drawn on by political parties is a also challenge to the government. Pepsi is faltering with slow speed of market development. Future Cola has taken a firm foothold with great potential for sales growth. c. The secret weapon for the success of Future Cola Compared to Coca-Cola, Future Cola has the advantage of home brand and carries out marketing communication under the slogan of “China’s Own Cola”, and that is the reason why the unique charisma and affinity of Future Cola have attracted a number of its brand loyalists in no time. Wahaha’s reputation is significantly higher than Coca-Cola in rural China, the population of which is about 70% of the total Chinese population. Secondly, Future Cola has advantage in price. The cost of Future Cola is lower than that of Coca Cola. A very critical factor to the success of Future Cola is the market network advantage of Future Cola in middle and small-sized cities and towns. Future Cola makes good use of the original sales channels of Wahaha for water and milk, realizes the sharing of the sales 233

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network, and successfully avoids confrontation with the direct marketing system of Coca-Cola in cities. Finally, the marketing and promotion activities also promote the development of Coca-Cola to certain extent. d. The threat to Coca-Cola Although “Coca Cola” is a famous brand in the world, Chinese people, whose consumption psychology is becoming increasingly, sophisticated has been throughout the period of “Blind Worship”; meanwhile, Future Cola conforms to the social psychology by the call to revitalize the domestic industry. Thus, in the eyes of many Chinese people with national sentiment and the children in middle and small-sized cities, towns and villages who grow up with Wahaha, Coca-Cola loses its dazzling aura as it enjoys in developed countries. Coca-Cola has a price disadvantage. The factors which restrict Coca-Cola from reducing its price are the following: the original Coca-Cola ice is transported from the United States; the human resources costs of Coca-Cola is much higher than that of Wahaha; and the cost of its direct sales network is too high; the bottling plants and the headquarters of Coca-Cola are not completely uniform with respect to the matters of interest and would not be willing to give up their vested interests. Coca-Cola is unable to take the network of middle and small sized cities and towns and villages into account. According to China’s national conditions of vast territory and abundant resources, the direct marketing system of Coca-Cola is difficult to be established due to constraints of transportation and the purchasing power in the rural and small city markets, the population of which accounts for 70% of the total population of China. The overall network advantage of Coca-Cola is greatly weakened therefore. Coca-Cola is unable to organize a large-scale promotion and advertising campaign in a short time. The lack of adaptability is a common problem of large companies with thorough management and complex institutions. Another practical problem is that some of the expenses for promotion and advertising in the country are shared by Coca-Cola and its bottling plants according to mutual agreements. It is difficult for Coca-Cola China Limited to coordinate the interests between Coca-Cola and its bottling plants and organize a unified marketing campaign simultaneously in a short time. e. The prospect of competition between Coca-Cola and Future Cola Although it is difficult for Coca-Cola to compete with Future Cola due to the incomparable 234

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advantages of Future Cola, Coca-Cola’s status of “giant” in the beverage industry will not change with respect to its global strength. The momentum of development for Future Cola will be strong if it maintains its current marketing campaign, focuses on the promotion of ground sales force, forms a system of sales in city, carries out the operations of supermarket distribution, improves the management level gradually, attracts and retains qualified talents at all levels simultaneously. With respect to strong challenges made by Coca-Cola to Chinese companies, Coca-Cola has to launch counterattack by a strong advertising marketing campaign, accelerate its development in the rural market and small city market such as price reduction and market occupation if it wants to secure its market position in China; otherwise, the most powerful brand in the world will become eclipsed in China.

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This book is the result of a co-publication agreement between Guangdong Economy Publishing House (China) and Paths International Ltd. ----------------------------------------------------Capital War: How Foreign Companies Fight Their War in China Wang Kangmao ISBN: 978-1-84464-108-6 Copyright © 2014 by Paths International Ltd, UK and by Guangdong Economy Publishing House (China). All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of the publisher. The copyright to this title is owned by Guangdong Economy Publishing House (China). This book is made available internationally through an exclusive arrangement with Paths International Ltd of the United Kingdom and is only permitted for sale outside of China.

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