Huawei is showing it can play with the big global boys, much to their annoyance. China’s perennial up-and-coming-but-not-quite-there telecoms equipment seller has scored a major victory in US court by winning an injunction to stop Motorola (NYSE: MOT) from transferring technology to Nokia Siemens Networks with the sale of the former’s telecoms equipment division to the latter. (English article; Chinese article) Huawei had argued that a past collaboration had given Motorola valuable technology that could compromise its own competitiveness. Obviously this case began before Huawei abandoned a minor acquisition of US company 3Leaf Systems last week, but its bound to make US legislators who cry wolf every time China tries to buy a US tech or energy firm take notice. That in turn could be good news for the likes of Huawei, ZTE （ＨＫＥｘ: 763）, and acquisitive energy firms like CNOOC (NYSE: CEO; HKEx: 883) and Sinopec (HKEx: 386), who are fast learning that if you want to play in the West, it’s best to learn all the tricks of the trade to make your presence felt.
Don’t Hang Up On Unicom Just Yet: Seeing is Believing
I’ve long been a naysayer on China Unicom (HKEx: 762), buying into the line that the company was a perpetual laggard despite being given the creme de la creme of 3G licenses in the form of permission to build China’s only network based on the globally dominant WCDMA standard. Now I’m not so sure. What’s changed? For one, I’m now in China instead of calling the shots from Hong Kong, which is also where most of the telecoms analysts are based. In the space of a single afternoon, I encountered not one but two friends who were both singing the praises of Unicom 3G to me — something unheard of just years ago when people scoffed at the mere mention of the Unicom name. They also said the company, the sole vendor of Apple’s (Nasdaq: AAPL) iPhone in China, has much improved coverage, another previous complaint. A look at the 3G numbers is also revealing: Unicom has about 30 percent of the 3G market, far better than the 20 percent of the broader market it commands. If it can get its integration issues behind it following its absorption of the former China Netcom, which seems inevitable, Unicom could yet become a force to be reckoned with.
What’s in a Name? Plenty for Best Buy in China
Best Buy (NYSE: BBY) has discovered there’s plenty in a name when it comes to retailing in China. The company may be a household name in its home U.S. market, but that didn’t mean much in China, where Best Buy is ending its brief experiment with its own brand by shuttering about 10 “experimental” stores it had opened over the past few years. Was the competition from homegrown giants Gome (HKEx: 493) and Suning (ShenzhenEx: 002024) too much? To some extent the answer is yes, though Gome continues to struggle with issues related to its jailed founder Huang Guangyu. But the bigger picture may be that Best Buy has realized it may be easier to build off an existing brand, hence its decision to put its China growth plans into Five Star, a homegrown chain it acquired a few years back. Best Buy has said it plans to boost its Five Star store count by a third this year, opening 40-50 stores to bring its total count to 210 by the end of 2012. If the strategy works, which looks like a good bet, look for other late-coming western retailers to also contemplate similar strategy of entering China via m&a, which seems to be the more effective way of competing in the vast market.
Hudong seeks anti-trust inquiry against Baidu (Chinese)
Trust in Baidu? No One Likes a Net Hog
Interesting reports out there saying a company called Hudong is seeking anti-trust action against Chinese search gorilla Baidu (Nasdaq: BIDU) and seeking 790 million yuan in damages. The damages figure is really beside the point. What’s interesting here is that Baidu, by virtue of its phenomenal success at cornering China’s online search market, has become a lightning rod for unhappy would-be competitors appealing to China’s increasingly assertive anti-trust regulators to intervene and create a more level playing field. Investors may have cheered Google’s (Nasdaq: GOOG) retreat from China a year ago, but the departure of the only serious competitor to Baidu has just provided more fuel for the anti-trust complainers. The growing potential for government intervention, coupled with Baidu’s sky-high stock valuation, are making this one look increasingly like a hot potato at least until the regulator takes a stand on this issue. Others that could also be at risk for similar reasons include Internet juggernaut Tencent (HKEx: 700), which is also the frequent target of complaints by many China web firms, Alibaba Group’s Taobao and potentially even well-connected giants like Lenovo (HKEx: 992).
Phoenix Wings Getting Clipped?
I’m hearing from one of my sources that Phoenix Satellite (HKEx: 2008), probably the only “foreign” broadcaster to boast anything resembling even slight success in China, has hit a road bump in its drive into the world’s most populous TV market. It seems that after years of giving preferable treatment to Phoenix, led by a former PLA propaganda officer, the Chinese Propaganda Ministry is actually asking for something in return. My source says the propaganda ministry wants Phoenix to do more to spread news about China to the outside world, which sounds largely in line with China’s broader goals of extending its “soft” power beyond its borders. Only problem is, when you ask private companies to get into things like the unprofitable business of soft power, the bottom line often ends up falling as victim. But then again, Phoenix can hardly afford to upset its Beijing sugar daddies. Stay tuned to see how the chips fall on this one, but the picture can’t look too good for Phoenix profits in the short term.
Ren Ren chases me-too IPO
Seems like anyone with a dot-com in their name and China in their address is chasing an IPO these days in hopes of getting a sky-high valuation from Western investors fixated on the fast-growing but only mildly profitable Chinese Internet market. The latest IPO wannabe, Ren Ren, which some are calling China’s Facebook, is reportedly seeking $500 million through a U.S. listing. The company hasn’t given financials, but I’ve no doubt it’s either losing money or is only mildly profitable. But that didn’t stop Youku (NYSE: YOKU), a Chinese video sharing site that went public last year and soared on its debut, only to trade sideways since then. Lesson from this is being first in your class does indeed command a premium. But that said, unless you can get in on the IPO itself, being first to market doesn’t mean you’re the best. There are plenty of other Chinese Facebook wannabes out there, including two companies called Kaixin and a service operated by China’s biggest Internet company Tencent (HKEx: 700) that could all turn out to be formidable rivals.
Alibaba Resignations: Is the Magic Gone?
Interesting news coming from Alibaba.com (HKEx: 1688), where CEO David Wei and COO Elvis Lee (guess he’s having a blue start to his Year of the Rabbit!) have resigned to take responsibility for systemic problems that led to unspecified falsified vendors on its B2B marketplace. Stock took a bit of a beating today, down more than 3 percent on the news. Question is: is there more to this than meets the eye? Truth be told, I wouldn’t be surprised. The company has repeatedly said that new user growth is slowing and that it needs to move up the value chain (i.e. get existing customers to pay more for premium services) to keep growing. I suspect this case may involve fabricated customers designed to keep the flagging user growth looking respectable. If that’s really the case, this company could be a good one to stay away from, at least until there’s more clarity out there.
Huawei quits 3Leaf buy, but stay tuned for more
Huawei has made it official: it’s abandoning its $2 million purchase for technology from a small US company called 3Leaf Systems after it became obvious the deal was becoming a lightning rod for anti-China sentiment in the US. But don’t think that this is the end. Huawei’s crosstown rival ZTE (HKEx: 763) recently lost a similar bid to supply telecoms equipment to build Spint’s (NYSE: S) 4G network, and expressed similar disappointment but said it wasn’t giving up on the market. And both of these companies are right. All this pettiness on the part of publicity-seeking US lawmakers is bound to backfire eventually, prompting Americans and other Westerners to ask just how much of a threat these deals really pose. That, coupled with pressure likely to come from China, could mean that Chinese m&a and other deals in the US for all but the most sensitive of assets could finally start to gain some steam in the next year or so. But whether or not they will succeed is another question entirely.
BYD Sell-Off … Price War Looming?
Could reports that car maker BYD (HKEx: 1211) has slashed prices in order to sell off bloated inventory sitting on dealer lots mean the beginning of a price war for China’s overheated car industry? Some mainland media are saying yes. After all, car makers are already under pressure to keep their red hot sales going, lest China lose its crown as world’s biggest car market, even after Beijing scrapped many of the incentives that caused the market to overheat in the first place. We’re already seeing sales growth slow, and Chinese companies are famous for their willingness to sacrifice everything — including profits — to keep their top line growing. Still, talk of a price war could be premature. In my view, BYD has lots of lemons sitting on dealer lots, and is desperate to get them out of the system and onto the roads. This could lead to temporary pricing pressure, but once these clunkers are out of the way we should see sales slow but prices staying relatively stable.
