Is China a pot of gold or a pitfall?
September 7, 2011 at 4:31 pm by Larry Levinson
China, its growing
middle class, and a total potential of 1.2 billion new customers remains a
strong draw for Western companies seeking to expand into new markets.
Besides the success
stories, a trio of recent reports serve as reminders that there is a
significant dark side to the Chinese market.
For Yum! Brands (YUM) — purveyors of Taco Bell, Pizza Hut, and KFC — China has been
an unalloyed hit. Operating earnings in the second quarter grew 25% on a 28%
increase in revenue, compared with a 28% decline in operating earnings in the
U.S. Total restaurants in the country grew to more than 4,000, with 99 in the
second quarter alone.
KFC's Chinese managers celebrate on
the Great Wall. Source: Yum! Brands
Put another way,
the company opens an average of more than one restaurant a day in the Middle
Kingdom.
Jeweler Harry
Winston (HWD), known for
lending out diamonds to drape Hollywood starlets for Oscar night, also sees a
bright spot in China.
“Nothing is too
big, nothing is too beautiful, nothing is too expensive for Chinese today. They
are on a quest for true luxury,” said Chief Executive Frederic de Narp, who is
making it the company’s mission to “seduce and serve the creme de le creme of
China.”
The company plans
to have 10 stores in China in five years, compared with just one each in
Beijing and Hong Kong today.
“All luxury brands
see China as a mass market. We see China as the most exclusive market in the
world,” de Narp said.
Behind the scenes,
Chinese officials are driving very hard bargains with companies that want
access to their markets. For a resurgent General Motors (GM), and the highly anticipated plugin electric vehicle Chevy
Volt, the ability to sell on a level playing field may come with a heavy price.
To qualify for the
subsidies of up to $19,300 a vehicle the government allows for electric
cars, China is demanding GM give a
Chinese competitor access to one of the vehicle’s key technologies, the New
York Times said.
The Volt has a
suggested retail price of about $41,000 in the U.S., excluding federal
incentives of about $7,500.
GM's Chevy Volt. Source: General
Motors
The new car market
in China is currently estimated at a world-leading 17 million vehicles a year.
China’s R&D
budget is too small to quickly duplicate the efforts that have resulted in the
Volt. “We have to break through and master the core technologies,” Chen
Jiachang, a deputy director of the ministry of science and technology, said in
a speech Saturday at a conference in China, the paper said.
The Volt would
compete with a sedan produced by China’s BYD Co., a firm backed by U.S.
investor Warren Buffett.
The demand, which
some say would violate World Trade Organization rules, is contained in a draft
policy in China that is awaiting final approval.
GM’s competitors
are waiting to see the outcome of the dispute before moving ahead with their
own electric car plans for China. However, a Ford Motor Co. (F) spokeswoman said the company would share some technology with
its Chinese partner, the civilian automotive affiliate of a large military
contractor.
Nissan (NSANY) won’t sell its Leaf fully electric car in China, but is
working with a Chinese partner to develop its own electric car for the country
by 2015, the paper said.
And when it comes
to the “rare earth” minerals that are a key part of many high-tech products,
such as electric cars, cells phones, and advanced light bulbs, China is using
its position to hold on to supply and attract investment. The country produces
virtually all of the world’s supply of 14 rare earth minerals — lanthanum
through ytterbium, plus scandium, yttrium and lutetium — and carefully controls
their export.
For the past two
years, export quotas have limited supply to 30,000 tons a year, compared with
worldwide consumption of double that number in previous years. In addition,
exports of raw versions of the minerals are subject to taxes of up to 25%, plus
value-added taxes of 17%, while items that undergo some processing in China may
leave tax-free, including the VAT.
“We saw the writing
on the wall — we simply bought the equipment and ramped up in China to begin
with,” Mike Pugh, director of
worldwide operations for light bulb maker Intematix, told the Times.
Despite sharply
lower costs for labor and equipment, amounting to pennies on the dollar,
Intematix would have preferred to keep its production closer to its Fremont,
California, headquarters to protect its jealously guarded proprietary
processes.
Finally, faced with
skyrocketing shipping costs in 2008, Brazil’s Vale (VALE) decided to buy its own ships to carry iron ore to China, its
biggest customer.
Earlier this year,
the Chinese refused to allow the first of those enormous bulk carriers to dock
at its ports. The Vale Brasil, touted on the company
website, had to be rerouted to Italy instead.
The ship, the
world’s largest bulk carrier with a capacity of 400,000 tons, is only the first
of 19 the company pledged to buy, including a total of seven from a shipyard in
Korea for $748 million and 12 from China for $1.6 billion.
Vale is now in
talks with other shipping companies, including China’s state owned COSCO Group
(CICOY), to sell or lease the fleet.
“We don’t want to
be a major freight operator or make money out of our shipping business,” Vale’s
global marketing director Pedro Gutemberg told Reuters. “We just want to make
sure that our freight cost doesn’t shoot up. So any person that wants to
partner with us is very welcome.”
COSCO is struggling
as the economic downturn has slashed rental rates for ships to about $25,000 a
day, down anywhere from 50% to 75% from the peak three years ago.
“Our counterparts
should hope for the best for us because right now we are in the restructuring
process of our bulk carriers,” a COSCO official, who wished
not to be named because he was not authorized to speak to the media on the
subject, told Reuters.
“In maybe one or
two years, China COSCO will be stronger, more efficient and a much more
reliable friend to cooperate with. All the outside parties should see this
issue in this way.”
The company’s
shares are down more than 50% so far this year.
More topics: byddy, China, Chinese stocks, CICOY, emerging markets, F, GM, hwd, investing in China, NSANY, rare earths, VALE, YUM
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