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China Flexes Regulatory Muscle on Nokia Siemens’ Motorla Buy; Huawei Lurks Behind the Scenes

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Foot-dragging by China’s anti-trust regulator as it considers Nokia Siemens Network’s $1.2 billion bid for Motorola’s (NYSE: MOT) networking business has the fingerprints of China’s top two networking equipment makers, ZTE (HKEx: 763; Shenzhen: 63) and particularly Huawei, all over it. NSN just announced yet another delay for its Motorola purchase pending a drawn-out approval process by Chinese regulators. (English article) Such foot-dragging seems to have become the modus operandi for the regulator, which has developed a habit of delaying whenever it sees a deal it doesn’t like for whatever reason, and eventually letting such deals die on the vine with little or no explanation. Recent losses of major U.S. deals for both Huawei and ZTE are no doubt stoking the Chinese regulators’ ill feelings towards the NSN-Motorola deal, and an ongoing Huawei lawsuit against Motorola likely isn’t helping the matter. Of course, all of this is politics and has little or nothing to do with the anti-trust functions the regulator is supposed to fulfill. If this is a sign of things to come, China is sure to come under fire for its growing willingness to block global m&a under a process that is completely opaque and smacks of politics.

VERDICT: China will drag its feet on this one but will ultimately approve it or risk facing the wrath of governments in both the U.S. and Europe.

Sohu’s Sogou and Shanda’s Groupon: Barking Up the Wrong Trees

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So, now we hear that Sogou, Sohu’s (Nasdaq: SOHU) search engine wannabe, is losing money hand over fist, while Shanda Interactive (Nasdaq: SNDA), which can’t decide exactly what it wants to be, may be mulling a foray into online group buying similar to U.S. phenomenon Groupon. First Sogou, whose Chinese name, which translates to “search dog”, may be closer to the truth than it realizes. Sohu has been trumpeting this venture for five years now, and yet after all that time it has yet to take a significant bite out of the search market, still dominated by Baidu (Nasdaq: BIDU) and lost $27 million last year, even more than its $20 million loss the year before (English article). Meantime, other media reports are saying Shanda has purchased a Web address that translates to “group discount”, leading many to speculate the  comany may be preparing to enter this business. (English article) Come on, guys. Sohu may have made a good move into online games a few years back with Changyou (Nasdaq: CYOU), but it needs to read the writing on the wall with Sogou, which has morphed into a money eating machine. Likewise with Shanda, group buying sites have become the flavor of the day in China, and there’s no indication whatsoever that Shanda has what it takes to compete with Groupon or any other big guns that have launched China group buying sites.

Starbucks China Expansion: New Brew Needed to Serve Up Success

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Since  I’m writing this from a Starbucks (Nasdaq: SBUX) in Shanghai, I figured I’d start the day with a posting on the ubiquitous coffee chain’s plans for a major expansion in China — and its chances for success. The China Daily reports that Starbucks, following in the footsteps of other big global names like Nokia (Helsinki: NOK1V) and Dell (Nasdaq: DELL), is preparing to blaze a trail into China’s 2nd and 3rd tier cities, with plans to open 1,500 new stores by 2015. This kind of hyper expansion sounds very typically Starbucks, and its success or failure will depend highly on getting the recipe right for cities that are far more cost sensitive than Beijing or Shanghai. The report says Starbucks will develop more cakes and tea drinks as part of the drive, presumably to better suit smaller town tastes and wallets. Let’s face it: people go to these stores as much as a social thing as they do for the food, so there’s no reason people in smaller towns won’t want to socialize. The main issue will be getting the price right, as no one in these towns will want to spend a third of their monthly paycheck simply for the right to socialize.

Welcome to the China Dollhouse: Barbie Packs Up Shanghai Camper

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Just two weeks after US electronics powerhouse Best Buy (NYSE: BBY) pulled the plug on its namesake stores in China, toy giant Mattel (NYSE: MAT) is doing the same for its flagship House of Barbie store in Shanghai, leaving its leading doll as the latest casualty in the China retail market. (English article; Chinese article) While these two cases do reflect the cutthroat nature of China retail, Mattel’s pullback also shines a spotlight on what the Chinese are and aren’t willing to spend their hard-earned money on when it comes to big brands. While they’re willing to fork over hundreds or even thousands of dollars for that latest Gucci or Louis Vuitton bag or Longines watch, toys for the youngsters are quite a different matter. In fact, to my limited knowledge there are no “designer” toy brands in China yet, which shows where many parents’ minds are when it comes to their kids: they would rather spoil them with little emperor designer clothes or tutoring lessons at a nearby cram school than the latest designer doll or model car. If those trends continue, it could be a while still before Barbie or any other premium toy makes significant headway in China.

Lenovo: Nothing New in LePad 2

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Lenovo’s (HKEx: 992) name may contain the Latin word for “new”, but this company’s me-too strategy is showing it is hardly an innovator worthy of its position as the world’s fourth biggest PC seller. In the latest case of its follower approach, the company announced its going to launch the LePad 2, an updated version of its tablet PC. Uh, does this sound just a tiny bit familiar to anyone? If they’re going to so blatantly follow tablet PC leader Apple (Nasdaq: AAPL), at least they could wait more than a week after Apple’s big iPad 2 announcement to announce their own latest me-too product. I do like the fact that Lenovo is trying to develop its own “Le” line of products, including LePads and LePhones, to become  more diversified in keeping with the times. But again, just take out the “Le” and substitute an “i” and … you get the picture. What’s more, the Apple products have a huge following in China, where Lenovo derives half of its revenue, while the Le monniker leaves most people scratching their heads. If Lenovo really wants to have a serious future in the global computing business, it’s going to have to step up its game a notch.

Watch Out Lancelot: Slowdown Looms in Camelot

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In addition to the big names I want this blog to spotlight some smaller up-and-comers that don’t necessarily receive as much ink, bringing me to Camelot Information Systems (NYSE: CIS) which just released 2010 results that were quite impressive but 2011 outlook that hinted it may soon be sparring with harder times. The IT services provider, whose shares have largely traded sideways since its IPO late last year, reported more than 60 percent growth in 2010, banking in particular on strong demand from China’s fast-growing financial services sector. (results release) Perhaps in light of growing warnings that the same financial services sector may be poised for a significant correction, Camelot forecast its growth would slow sharply this year to about half of 2010’s level, though it failed to provide any explanations. In any other situation 30 percent growth wouldn’t be all that bad. But in Camelot’s case, its current PE ratio of more than 50 times means this company may need some time to fill its richly valued new shoes in New York.

NPC: Same Old Same Old, China Mobile Hypes 4G, More Handouts for Bank of China

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The annual party for top execs of state-run behemoths, also know as the National People’s Congress, is officially up and running in Beijing and — surprise surprise — we’re hearing more of the same old stuff from China’s top capitalist communists. China Mobile (HKEx: 941; NYSE: CHL) Chairman Wang Jiianzhou was out talking up 4G, as he dodged questions about his company’s weak showing in a national 3G race that has seen rivals Unicom (HKEx: 762; NYSE: CHU) and China Telecom (NYSE: CHA; HKEx: 728), armed with better technology, gain significant market share. Wang says his company has significantly expanded trials for its untested 4G technology. Still, I wouldn’t hold my breath that China’s telecoms regulator — after dragging its feet forever to get 3G up and running — will be in any hurry to issue 4G licenses anytime soon. Meantime, Bank of China’s (HKEx: 3988; Shanghai: 601398) President Li Lihui told reporters at the NPC his bank could do even more fund raising to arm itself against future downturns. (English article) I honestly can’t see the government giving a green light to this one after allowing all its banks — including BOC — to raise billions in new funds less than a year ago. And the fact that they’re even talking about doing something like this again so soon could be a warning flag to investors that trouble could be brewing below the surface of those hunky dory quarterly reports  that Bank of China and its peers are always issuing.

Watch Out Youku: Google-backed Xunlei Marching to Market

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Shares of recently listed video-sharing site Youku (NYSE: YOKU) got a nice bump earlier this week on better-than-expected earnings as it moves closer to profitability; but some of the wind could soon come out of its sales on reports that rival Xunlei is also planning its own overseas IPO (English article). What’s interesting here is less the fact that Xunlei may be revving up for a second-to-market IPO, and more the fact that the company counts Google (Nasdaq: GOOG) among its backers. Many of you may recall that search giant Baidu (Nasdaq: BIDU) was in a similar situation a few years back, revving up for its Nasdaq IPO when Google zoomed in at the last second and made an offer for the company which Baidu ultimately refused. Google is no slacker when it comes to web technology, and, especially given its recent retreat from the China search market, I wouldn’t be at all surprised to see if make a bid for a bigger stake or even outright purchase of Xunlei in the run-up to an IPO. Who knows: Maybe history willl turn out differently this time, as Google could certainly use a China video-sharing site to complement Youtube.

Mindray, HiSoft See Slowdown in 2011

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Medical Device maker Mindray Medical (NYSE: MR) and software outsourcer HiSoft (Nasdaq: HSFT) have just reported year-end results, with both forecasting significant slowdowns in the year ahead. (Mindray release; HiSoft release) First Mindray: despite’s its China pedigree, the company’s 2010 results were hardly mind-blowing, with 2010 growth of about 11 percent and set to drop slightly to 10 percent this year. HiSoft, which boasts a client list of major western names, posted a more China-worthy 60 percent growth rate in 2010, but forecast that figure would come down sharply this year to 35 percent top line and 25 percent bottom line growth. Is this reason for alarm? For Mindray, the status quo in 2011 seems to indicate this company may not be set for steroid-like growth anytime soon, but may be a dependable play for longer term slow-but-steady returns (including a dividend). In HiSoft’s case, it’s a bit harder to say. Chinese companies are notorious for lowballing their outlook to give themselves plenty of room for error. But such a major lowballing could be a bit of a warning flag for this upstart firm trying to take on the Indian giants.

Sina Puts Cash Pile to Work in Mecox

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Mecox LogoAn interesting deal coming out of Sina (Nasdaq: SINA), which is using a modest $66 million from its large cash pile to buy 19 percent of fashion e-commerce site Mecox Lane (Nasdaq: MCOX) from venture capital firm Sequoia Capital. (English press release) After thwarting a hostile takeover attempt by Shanda Interactive (Nasdaq: SNDA) several years back and stumbling in its own bid for Focus Media (Nasdaq: FMCN), Sina finally seems to have found success in a hodgepodge formula of building up and partly spinning off side businesses, like it did with its real estate arm, China Real Estate Information Corp (Nasdaq: CRIC), and now buying strategic stakes in other assets. In the course of doing this, Sina, arguably China’s best known Web portal, is quietly building itself into a truly diversified Internet media giant: something many of the country’s other net firms have tried to do but as of yet have been largely unsuccessful. Nice moves, Sina.

Alibaba, Baidu Get Snagged in U.S. Piracy Report

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As if Alibaba Group’s problems weren’t bad enough, now the company, along with fellow Chinese Web firm Baidu (Nasdaq: BIDU) have become ensnared in a U.S. report accusing them of hosting sites that are rampant with piracy. (English article; Chinese) The U.S Trade Representative’s office has branded Alibaba’s Taobao e-commerce site and Baidu as “notorious markets” for abetting piracy and counterfeiting — a move that won’t do much to boost Taobao’s prospects for an IPO that many suspect will come in the next year or so. As you may recall, Alibaba’s B2B site, Alibaba.com (HKEx: 1688), is embroiled in its ownalibaba scandal involving bogus vendors who defrauded buyers, resulting in the resignation of its CEO and COO. Chinese media are saying the report may be payback for China’s hard line towards Google (Nasdaq: GOOG) and other western Web firms in China. But regardless, investors might be well advised to avoid any Alibaba companies and also Baidu until the dust settles on this one. Investors in Yahoo (Nasdaq: YHOO), whose stake in Alibaba is one of its most lucrative assets, might also take note.