I frequently criticize Chinese firms for a herd mentality that often sees them rush blindly into emerging industries, but this time I need to redirect my criticism on foreign companies that are taking the same approach to the nation’s massive car market. The latest media reports cite Volkswagen (Frankfurt: VOWG) saying it will look to China to offset its slowing sales in the west, with plans to nearly double its Chinese production capacity over the next 5 years. (English article)
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Laggard Telcos Blame WeChat For Woes 落后的电信公司将困境归咎于微信
The ongoing showdown between Internet titan Tencent (HKEx: 700) and China’s 3 major wireless carriers has been in the headlines nonstop these last few days, spotlighting the backward state of China’s mobile sector whose monopolization by massive state-run companies has stifled innovation. The original spat began late last year, when dominant mobile carrier China Mobile (HKEx: 941; NYSE: CHL) complained it was losing traditional text messaging business to Tencent’s popular WeChat mobile messaging service. (previous post) WeChat, known in Chinese as Weixin, allows users to send instant messages to each other for free by letting them communicate over the Internet.
Excerpts
On understanding the media’s mandate to promote the Communist Party’s agenda:
(From Chapter 1 — The Agenda: Telling the Party’s Story)
A helpful metaphor to understand the world as depicted by China’s media is the classic family portrait. This highly choreographed photo has mother and father at the center surrounded by their sons and daughters, everyone cheerful and smiling. Nowhere is there any sign of the many conflicts that most such families have, from minor issues like everyday fights between siblings to deeper resentments due to different priorities. All of those negative elements have been left from the portrait, even though they exist and are very real factors for everyone within.
As head of the Chinese “family,” the Communist Party uses China’s media to show the world as a harmonious place – one where farmers and factory workers smile and whistle while they work, where scientific and economic achievements abound and where the party is a source of comfort and assistance in times of trouble. Seldom is there mention of the constant power struggles taking place behind the scenes, or of smaller embarrassments like the naming in 2010 of a jailed dissident as China’s first Nobel Peace Prize winner, to say nothing of major screw-ups like the Great Leap Forward – an agricultural disaster of the 1950s that saw as many as 40 million people die of starvation during one of Mao’s many disastrous initiatives under its centrally planned economy.
China’s media is a sort of window onto the soul of the Communist Party. It contains the party’s message of the day, its broader agenda and information on how it aims to achieve its goals. It also contains messages – some straightforward and others more veiled – of what is and is not acceptable, and what happens to those who make trouble. Equally important is what’s NOT reported, be it an event that’s considered taboo or an official who has fallen out of favor. By understanding China’s media and how and what it chooses to report, one can start to understand not only the Communist Party’s agenda, but also its hopes and insecurities, what it sees as its accomplishments and shortcomings, and how it plans to lead the world’s most populous nation and second-largest economy through the 21st century en route to becoming the next global superpower.
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On how the government exercises its control:
(From Chapter 2 — Spread the Word: The Machinery)
To make sure its media message is properly and uniformly delivered, Beijing has developed a well-oiled machine to craft and control that message by making decisions at the top and letting those coverage guidelines filter down to the provinces with ever-increasing speed. Cogs in the machine are many and varied, ranging from placement of a Communist Party secretary in the top ranks of most major media, to frequent phone calls and memos sent by the Propaganda Ministry to senior editors at those same media. The message-crafting machinery has moved in step with the media’s own changing role over time, ebbing and flowing with the level of central control in the sixty years since the founding of the People’s Republic.
In its very early days, the Communist Party took a surprisingly relaxed view toward the media, both from political and commercial standpoints. Immediately after 1949, a large number of smaller political parties, many sympathetic to the Communists, were allowed to keep publishing their own newspapers and magazines with their own political views. The two sides had an understanding: the smaller parties had no designs on power or governing, which would be the exclusive terrain of the Communist Party. Instead, the smaller parties reserved the right to constructively criticize the government’s policies, acting as a benign watchdog to keep the Party honest and moving in the right direction.
That relatively enlightened situation lasted for only a few years into the 1950s, when Mao discovered he wasn’t as fond of criticism as he had previously thought, especially when the criticism was directed at some of his pet projects like the collectivization of farms that would ultimately lead to the catastrophic Great Leap Forward of 1958-1961, which saw millions die of starvation. As Mao and the Communists became increasingly uneasy with the criticism and plurality of the earliest media landscape, most of the smaller party papers were either gradually shut down or gutted of their critical voices and replaced with the centrally controlled system that came to characterize China for much of the 1960s and 1970s, where all media, regardless of their stated political affiliation, became little more than bullhorns to tout the Communist Party’s latest accomplishments and promote its initiatives. …
Most recently, the Internet has become another major media force, with China officially surpassing the US in 2008 to become the world’s biggest online market based on the number of Web surfers. In this new Internet age, Beijing has conceded some degree of control with the explosion of huge volumes of online content on blogs, message boards and other Web sites that are impossible to monitor closely. But the government hasn’t completely relinquished its role as opinion leader, designating nine Web sites in 2000 as flagships of China’s official online news. In making that decision, it instructed newspaper editors nationwide to closely follow those nine, which included Xinhua, the English-language China Daily, and People’s Daily, making them the party’s official online voices. It also still closely monitors the Web, and attempts to strategically “seed” online discussions that promote its agenda in various blogs and chatrooms.
Int’l Board Still Years Away 中国股市国际板推出路漫漫
After writing just last month about the endless delays for Shanghai’s long-awaited international board, we’re getting new indications of a prolonged wait for the launch of this new stock exchange that would let overseas firms sell their shares to domestic Chinese investors. Anyone hoping for a launch of the board anytime soon will be deeply disappointed to learn the latest signals pointing to a debut in 2015 at the earliest and most likely much later.
Cloudary Turmoil, Where Are The IPOs? 盛大文学高层震荡 IPO计划何去何从？
New reports of turmoil at Cloudary, the literature unit of online entertainment firm Shanda, mean the company’s highly anticipated New York IPO may be delayed until the situation there settles. From a broader perspective, the absence of any New York IPO news from Cloudary or any other Chinese firms so far this year comes as quite a surprise to me, as I was previously predicting a mini-flood of such offerings following nearly 2 years of inactivity due to negative market sentiment. But instead of this steam of new offerings,the opposite has happened as a growing number of firms announce plans to privatize and de-list their shares from New York.
Coke Stumbles, KFC Bounces Back 外国大企业在华丑闻或很快被淡忘
New reports on global food and beverage giants Coca Cola (NYSE: KO) and Yum Brands (NYSE: YUM) are highlighting some of the unique challenges of doing business in China, while also showing that Chinese are quite willing to forgive these global giants’ missteps if they show proper contrition. In fact, most of these so-called missteps are due to uniquely Chinese circumstances that most major multinationals would never have to worry about in more developed western markets.
As such, these problems are rarely the result of intentional actions, which is perhaps why Chinese consumers and officials are so willing to quickly forgive the transgressions. A good dose of contrition is also important, with the big western food and beverage giants all becoming quite skilled at offering numerous apologies and other public announcements to show they are working to solve the problems each time a new scandal occurs.
Most of the recent scandals are related to food safety, but the latest crisis confronting Coke comes on the completely unrelated area of national security. In this case, the world’s biggest beverage company is being investigated for potentially violating some of China’s national security laws by mapping parts of southwestern Yunnan province. (English article)
The allegations are coming from a local provincial body, which is alleging that Coke may have used handheld GPS equipment to illegally gather classified information. Coke, which is now quite experienced at handling this kind of crisis, responded by saying it is fully cooperating with the investigation. It added that it has uses commercially available GPS services at many of its bottling operations to help improve customer service and fuel efficiency.
This move against Coke comes just months after a unit of Chinese construction equipment giant Sany Heavy (Shanghai: 600031) was blocked from investing in a US-based wind farm also on national security grounds that weren’t ever explained. (previous post) It’s unclear if this case is related to that veto.
But regardless of the reasons, the case does underscore the fact that something as seemingly innocuous as mapping using commercially available products can be considered a national security issue in China. Google (Nasdaq: GOOG) made a similar discovery when it clashed with Beijing last year over its popular mapping service in China. (previous post) I’m relatively sure that Coke will quickly settle this case and the negative headlines will subside, as it’s unlikely the company deliberately engaged in any illegal action.
Meantime, Yum is saying separately that same-store sales for its flagship KFC brand in China fell 20 percent in the first quarter of this year. (English article) While that kind of drop would normally look catastrophic for a company like Yum, which counts China as its biggest market outside the US, the figure is actually a bit better than the 25 percent drop that many company watchers were expecting.
KFC has been in the headlines for much of the last few months due to a food safety scandal after media reported that chickens from one of its smaller suppliers contained excessive antibiotics. (previous post) The scandal caused KFC’s China sales to slump at the end of last year, and also took a big bite out of Yum’s stock price.
The relatively quick bounce-back in Yum’s business doesn’t surprise me at all, as similar scandals at other major multinationals ranging from McDonalds (NYSE: MCD) to Carrefour (Paris: CA) are often forgotten within a few months by Chinese consumers and officials who generally trust the big foreign names more than local Chinese rivals. At the end of the day, Yum can probably expect its KFC business to return to a growth track by the third quarter of this year, while Coke can expect its Yunnan tussle to quickly pass with little or no negative impact on its China operations.
Bottom line: A new scandal involving Coke and a previous food safety scandal involving KFC are likely to pass quickly, having little long-term effect on the companies’ China operations.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.
Alibaba Dresses Up With New CEO 阿里巴巴新CEO上任
The Internet world is buzzing this week with word that Alibaba founder Jack Ma will hand over his CEO title to another company executive, ushering in a new generation of leadership for China’s leading e-commerce firm. But this change looks largely superficial to me, and is most likely designed to please investors as the company gets set for its multibillion-dollar IPO that could happen later this year. Instead of chief executive officer, the title of chief administrative officer would probably be more appropriate for the role that Alibaba’s incoming number-two man Jonathan Lu will play. That’s my assessment based on what I know about the strong-willed Ma, who will stay firmly in charge of Alibaba from his remaining position as executive chairman.
The headlines have been filled nearly non-stop this week with news of Lu’s appointment, which comes after Ma announced in January that he would yield his CEO title to a new person by May. (English article; previous post) Lu’s appointment didn’t come as a huge surprise, since he’s a long-time employee who has worked in many of Alibaba’s divisions, most recently as head of its data division, and thus is very familiar with the company.
Equally important, Lu’s 13 years at the company has given him plenty of time to work with Jack Ma, whose strongly opinionated management style has previously caused him to clash with other executives. Media have been mixed in their analysis of Lu’s selection; some say Lu will be a transitional leader until Ma finds someone younger and more charismatic to lead his company, while others said Ma is grooming Lu to eventually take over the chairmanship and lead the company.
One common theme was that few believe Lu will be able to match Ma’s charisma and broader vision that helped Alibaba to grow from its roots as an online business-to-business marketplace to become China’s largest e-commerce firm worth $35 billion or more. I’ve followed Ma and Alibaba for quite some time, from his earlier days when he relished his role as company spokesman to more recent times when he rarely gives interviews.
Throughout the process, one things has remained constant: Ma is a man who likes to be in charge. He has created a company that mirrors his own aggressive, opinionated style, which in many ways is one of the biggest factors behind Alibaba’s success. But that same style has caused Ma to clash with others who have disagreed with his vision or tried to help him run his company.
The most poignant and public of those clashes came with Carol Bartz, the equally opinionated former CEO of US Internet giant Yahoo (Nasdaq: YHOO), which became Alibaba’s master with its 2005 purchase of 40 percent of the Chinese company. During her brief tenure as Yahoo CEO, Bartz and Ma became famous for their frequent clashes that often ended up in both the headlines and critical off-the-record comments from people within Alibaba. The colorful clash finally came to an end with Bartz’s firing from Yahoo in 2012.
Ma learned his lesson from that clash, and has carefully cultivated a field of capable executives around him who are adept at running businesses but probably know better than to challenge the views of their company chairman. Lu probably embodies this profile of “capable listener”, which is what Ma wants and needs around him.
All of this brings us back to the original subject of what the future holds for Alibaba under Lu’s tenure as CEO. The answer is that probably nothing will change. Investors may like the move, as it makes Alibaba look more like a western company, where good corporate governance says the roles of CEO and chairman should be separated between 2 people. Ma wants to make such a good impression as his company prepares to make a multibillion-dollar IPO, in what would become China’s biggest ever Internet offering.
But anyone worried that Ma may leave his company anytime soon, or give any important decision-making functions to Lu, can probably relax. At just 48 years old, Ma won’t be leaving his company for quite some time. And Ma’s fondness for staying in control means that Lu is likely to take on a role as his chief administrator. Meantime, Ma will continue to make all the big decisions as the rest of his executive team listens, nods politely and then carries out those decisions.
Bottom line: Alibaba’s naming of a new CEO is largely a cosmetic move, with Jack Ma likely to stay firmly in charge of the company for at least the next decade.
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Home Inns, 7 Days In Travel Slowdown 中国酒店行业增速放缓
Leading hotel operators Home Inns (Nasdaq: HMIN) and 7 Days (NYSE: SVN) have just reported their latest quarterly results that show a looming slowdown in China’s fast-growing travel sector, reinforcing a similar picture to emerge last week from rival China Lodging (Nasdaq: HTHT). The slowdown appears to be the result of several factors, most notably a massive expansion spree by not only these budget hotel specialists but also by big global high-end brands like Marriott (NYSE: MAR) and Intercontinental (London: IHG) in China. The other big factor is China’s broader economic slowdown, which has undercut demand as both leisure and business travelers cut back on their spending.
If past experience is any indicator, 2013 is likely to be a weak year for the highly cyclical industry, but we could see a nice rebound in 2014 as the economy recovers. Accordingly, any investors looking to buy into the rebound might wait until the middle of this year, by which time a looming sell-off sparked by this latest series of downbeat earnings reports is likely to ease.
All that said, let’s take a look at the latest reports from Home Inns and 7 Days, the latter of which is in the process of de-listing its share from the New York Stock Exchange in a privatization bid. Both companies reported that growth slowed in the fourth quarter of last year, and forecast further slowdowns in the current year, echoing similar sentiment last week from China Lodging, operator of the Hanting chain of hotels. (previous post)
Let’s look first at Home Inns, China’s largest publicly listed hotel operator, whose revenue increased about 12 percent in the fourth quarter — a sharp slowdown from the 46 percent growth it posted for all of 2012. (results announcement) The company’s net income for the quarter plunged 80 percent and it actually reported a net loss for the full year, dragged down by the loss-making operations of its recently acquired Motel 168 chain. It forecast revenue growth would remain sluggish this year, rising about 16 percent from 2012.
After plunging as low as $17 last summer, Home Inns shares have rebounded strongly and now trade at around $30. The shares were largely unchanged after this latest report came out, but I suspect they will come under pressure in the months ahead as its growth continues to slow.
Meantime, 7 Days’ results looked slightly better, with fourth-quarter revenue up 28 percent, the same as the growth rate for the entire year. The company’s profit grew nearly 8 percent, which was down sharply from the 36 percent gain for the whole year. Like Home Inns, 7 Days forecast revenue would rise about 16 percent for the year, or only about half of 2012’s growth rate.
As I’ve said above, the results from all 3 of China’s US listed hotel operators point to a similar slowdown that is quite common for this sector. All 3 companies are taking advantage of that slowdown to position themselves for the next uptick, most notably by embarking on major new building sprees. China Lodging plans to expand its hotel count by about a third this year, and Home Inns and 7 Days plan to increase their count by about 20 percent and 27 percent, respectively. Home Inns also recently entered into an agreement with outdoor advertising specialist Tiger Media to sell billboard space on its properties, providing a strong potential new source of revenue.
All things considered, the sector and these stocks are likely to sink from their recent highs in the months ahead as the current downturn sets in. But I do expect to see the situation start to improve by about this time next year, at which time all 3 companies should be well positioned to capitalize on the next industry uptick.
Bottom line: The latest results from Home Inns and 7 Days point to a growing hotel industry slowdown which should last most of this year, with the next uptick likely by mid 2014.
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Simcere to De-List, Vipshop Adds Shares 先声药业退市唯品会增发 冰火两重天
A week after shares of Internet portal Sohu (Nasdaq: SOHU) went on a roller coaster ride on rumors of a de-listing plan that the company later denied, we’re getting word that drug maker Simcere Pharmaceutical (NYSE: SCR) is launching the latest privatization plan by a US-listed Chinese firm. In related news, media are also reporting that online game operator The9 (Nasdaq: NCTY) is also considering such a plan. But red-hot e-commerce firm Vipshop (NYSE: VIPS) is moving in the opposite direction, announcing a plan to sell more shares to raise up to $180 million. These very different tales show that overseas investors have become quite choosy toward Chinese companies in the current climate, richly rewarding a few fast-growth players while largely ignoring most others.
Solar Sell-Off As Suntech Delays 尚德延期，太阳能股被抛售
Solar investors are feeling decidedly bearish this week, bidding down shares in most major solar panel makers even as a few major names including Suntech (NYSE: STP), Canadian Solar (Nasdaq: CSIQ) and JinkoSolar (NYSE: JKS) tried to prime the market with upbeat news. But truth be told, the news from all 3 of these companies looks marginally positive at best, which clearly wasn’t enough for investors who have grown tired of the non-stop bad news from an industry that has been struggling for 2 years now due to massive oversupply.
4G Buzz: Who Gets What? 中国4G网络迷局
Chinese telecoms officials have been speaking non-stop these last 2 weeks about fourth-generation mobile networks, better known as 4G, making the roll-out of commercial 4G services look almost inevitable as early as the third quarter of this year. But amid all the buzz, the critical question and previously hot topic of which telcos will be assigned to build networks based on what 4G technology standards has quietly disappeared from the discussion.
