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Saturday, July 09, 2005

Chinese Global Enterprises : Undue Optimism!!

The International Herald Tribune writes The speed of Moulin's collapse has stunned investors. The company ranks as the third-biggest manufacturer of eyewear in the world, producing brands like Aigner, Longines, United Colors of Benetton, Revlon and Nikon at factories in China and the Czech Republic. After a spate of acquisitions, its distribution business, through Metzler International, reached across Europe and the United States.

In early March,by buying a majority stake in Eye Care Centers of America, which owns retail outlets like EyeMasters and Visionworks, Moulin had turned itself into a truly global eyewear business. Moulin spoke of ambitions to create a 500-store chain in China, where it already had 58 stores. "The reason why Moulin did the deal with Eye Care Centers of America was that it was a platform for more acquisition opportunities," Ma, Mouling honcho said in an interview at the time. What went wrong at Moulin is under criminal investigation.The police investigation focuses on concerns raised by 30 creditors, led by HSBC Holdings, over accounting irregularities within the company that came to light when Deloitte Touche Tohmatsu, Moulin's auditor, resigned in April. It followed the departure of Ernst & Young as auditor in December.

John Hagel, commenting on this writes, this story offers a broader message.Many Chinese companies are tempted to emulate Western companies. They want to diversify beyond specialized manufacturing activities and develop brands of their own. This is likely to be a mistake. It may undermine the deep advantage that is driving the success of these Chinese companies. Chinese companies have deeply specialized and are focused infrastructure management businesses – high volume, routine processing activities, like contract manufacturing or operating logistics networks. They have aggressively built capabilities in these businesses and possess a distinct advantage over many Western companies that were more diversified.
Through its acquisitions over the past decade, Moulin tried to simultaneously enter two other businesses – product innovation and commercialization (design and branding of eyewear) and customer relationship businesses (retailing).These are very different kinds of businesses and inevitably represent a loss of focus. Moulin would have been much better advised to focus on aggressive growth as an infrastructure management business. These businesses have the potential to become very large and profitable, especially if Chinese companies continue to focus on accelerating capability building. The success of many Chinese companies to date has come from much tighter focus. Rather than emulating Western companies, these Chinese companies should recognize that their success hinges on challenging the traditional model of Western companies. They depart from that path at their peril.Lenovo and Haier have been primarily focused on serving the domestic Chinese market, unlike the highly specialized offshoring service providers that focus on global markets. These companies are already playing across the three business types mentioned above – in this respect, they look like more diversified Western companies. They have one big difference with their Western counter-parts. Their close relationship with the Chinese government gives them access to virtually zero cost capital through the country’s state-owned banks, These buyers are likely to run into a different sort of trouble as they go on the prowl for Western assets, especially Western brands. Cheap capital creates the risk of overpaying for assets, especially for product brands, at a time when product brands are actually diminishing in economic value. These Chinese companies would be better advised to unbundle and specialize in one of three business types – infrastructure management businesses (contract manufacturing), product innovation and commercialization businesses or customer relationship businesses. Trying to straddle all three businesses will only lead to trouble - especially if they have access to cheap capital that diminishes their sense of urgency about the difficult choices ahead.
Not for nothing that the economist is arguing the US admin to allow CNOOC’s bid for takeover of Unocal. For those who think that chinese enteprises could lead the world - certainly calls for deep introspection. The economist article goes on to compare CNOOC's bid with several failed investments that Japanese made in the last two decades in the US and the Tokyo stock exchange is now half of its peak.

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