By Tan Sri William Cheng, Lion Group Chairman & CEO and President of The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) at a Forum in conjunction with ACCCIM’s 60th Anniversary on 23 July 2007
I chose the topic "Venture into China - My Personal Experience" at today’s Forum for two reasons. One is that the Lion Group is one of the Malaysian pioneers that ventured into China in the early 1990’s. According to the Minister of Commerce of China, Mr. Bo Xilai, Malaysians have invested US$ 4.3 billion in China since the Chinese government started economic reforms in 1978 (note: this figure may not have taken into account Malaysian enterprises investing in China through other means). In this amount of US$ 4.3 billion, about 21% or US$900 million is from the Lion Group. The second reason is that I have been invited several times in the past to speak on this topic, but was not able to accept the invitations. So given an opportunity today, I think this might be the right time for me to share with you some of my experience in our venture into China.
The Beginning
In 1978, Chinese leader Deng Xiaoping initiated reform of the planned economy towards a more market-oriented economy. Under the open-door policy, foreign investment and foreign trade rapidly increased. From 1979, the Lion Group has bought iron raw material from China. In 1985, I joined the delegation led by former Prime Minister, Tun Dr. Mahathir Mohamad to China. A year later, in 1986, I led a team of my senior managers to China to study its investment climate and actual situation. China at that time was still quite reserved about foreign investment. Foreigners could come to invest, but 100 percent of your products must be for export. Compared to our production in Malaysia, in terms of cost and market, it did not make much difference. So I did not commit myself to invest.
I waited patiently for almost 6 years until Deng Xiaoping made his famous "Southern Inspection" in 1992, in which he cleared the air for foreign investment. I went to China that year and started our actual investment in 1993. The Group ventured into the retail business in China with the opening of its first Parkson department store in 1994. Todate, our investment totaling around US$ 900 million covers some major sectors, namely retail, automotive and parts, tyre, etc.
Operation Model
After considering the operation models, I decided to joint-venture with the local governments or enterprises. The reason being at that time, foreigners investing in retail or automobile businesses were required by regulations to have a Chinese partner, owning at least 50% of the shares for the car and motorcycle business, while in retail business, the local partner must play the major role. I opted to joint-venture with the local governments and enterprises as my experience taught me that these enterprises that followed the government’s instructions were more reliable. The outcome showed that I was correct, and we benefited from the joint-ventures.
I also believed it would be more practical to cooperate with the local existing factories than setting up new factories in a new environment and competing with the existing ones. We could expand the existing factories, add new equipment and make use of the manpower on hand. The operations could be faster and avoid unnecessary competition. Otherwise, if we had started from scratch by ourselves, it would have taken 2 to 3 years at least.
Not only time has been shortened with joint-ventures, we did not have to set up new factories, nor did we need to undertake business structure or marketing planning. Taxation, public relations and legal matters could also be handled by our partners. Therefore, to the new investor in China, it might be advisable to seek a reliable business partner. However, when it comes to share ownership, it would be better that you hold the absolute controlling shares. For those who intend to take over China’s state-run enterprises, you have to check the related assets carefully, and get professional consultation on legal, sales, logistic and financial matters. In addition, you have to establish cordial relationship with the local government institutions. As for the Lion Group, it was through the cooperation with the local governments and enterprises that we succeeded in penetrating into the strictly controlled retail and automobile sectors.
Parkson’s Success Story
Among the Lion Group’s ventures into China, Parkson’s retail business is relatively well-known to the Chinese as well as people outside China. Parkson is riding on the increasing spending power of Chinese consumers, and has now become one of the largest foreign retailers in China. There are more than 40 Parkson stores in 26 cities in China, and we expect to double the number of stores within the next five years.
Parkson Retail Group Ltd, a Chinese unit of Lion Diversified Holdings Bhd, was listed in November 2005 on the Hong Kong Stock Exchange, and raised US$208 million after pricing its Hong Kong initial public offering (IPO). We sold 165.6 million shares at HK$9.80 each, versus a proposed range of HK$8.40 to HK$9.80. At HK$9.80 each, Parkson was priced at 19:7 times its 2005 prospective pro-forma earnings. Now the share price stands at about HK$55 (in July 2007).
To run the retail business in China, you have to understand the diversification in different parts of China. For example, people in Beijing and Shanghai have different tastes in their choice of clothing. People in Guangzhou in the South spend more on food, while those in the North spend more on clothing because of the clear-cut seasons. So before we ventured into China to do retail business, we sent a professional team to do a marketing survey, studying various factors, such as urban planning, logistics and purchasing power of the consumers. We also had to be familiar with the investment policy and regulations of the local government as well as central government in China. | We decided on Beijing as a break-through location and we cooperated with a Chinese partner, the state-owned Arts & Crafts Company, to start the first Parkson store in China.
Parkson Beijing was positioned at middle-upper level so as to play a leading role in current fashions. Excellent service was strongly emphasized. At that time, retail businesses in China were mostly state-run and the service provided was very poor. Most of the sales items were locked in shelves in order to prevent them from being stolen. Parkson realized that satisfaction of the customers was one of the main factors for success. So from the very beginning, we provided excellent service, in an open-style and comfortable shopping environment. We encouraged the sales staff to sell more, and linked the sales volume to incentives and rewards. In addition, all the Parkson stores in China were linked up by network so that purchasing and capital controls were centrally managed.
As for the management staff of Parkson stores, 95% are local people. We organized professional courses to train the senior and middle ranking personnel. Although in the past, we did build complexes to house our Parkson stores, like the 49-storey building in Qingdao which cost RMB500 million, now we prefer to lease the premises. The return of investment in buildings takes a much longer time, normally more than 10 years, hence it is more economical to lease a building. At present, about 80% of Parkson stores are on lease basis and 20% are housed in our own buildings.
After China joined the WTO, it has become easier to operate in China. There are no restrictions on ownership, whereas previously we had to joint venture with a local partner. The easing of these restrictions has meant that we are now able to expand our businesses even further. However, as China has opened up the retail sector to foreign investors, it means fierce competition. Faced with these challenges, our new strategy was to open up more department stores throughout China. Our objective is to increase the number of stores to 100 in 5 years so that Parkson will be in almost all the major cities. In some cities, there are more than one Parkson store, like Shanghai and Kunming. In Beijing and Xian, three Parkson stores have been set up in each city.
The success of Parkson in China is due to the following factors:
I. Emphasis on training. We have tailor-made EMBA courses for our top management staff in collaboration with some prestigious universities like Qinghua University of China, Zhongyuan University of Taiwan and Australian university.
We have successfully trained more than 50 senior staff of high calibre to manage our stores in China.
II. All Parkson stores are linked up through networking, and information can be freely exchanged among the stores.
III. We maintain and enjoy good relationship with all the suppliers through a transparent system.
IV. We provide incentives to our sales staff.
V. We operate on the principle of honesty and never sell any fake items. Any customer who can find a fake item in our store will be rewarded RMB 100,000.
VI. We introduced Parkson Card system where Card members can enjoy special discounts.
Other Businesses in China
Besides retail business, we also invested in the motor and tyre sectors in China.
We have joint-ventures with China’s Dong Feng Automobile Co Ltd and Anhui Jianghuai Automobile Co Under the distributorship agreements with these companies, our Group is targeting to expand the light trucks business by launching more models and penetrating the ASEAN market. We also have investments in joint-ventures engaged in manufacturing and assembling trucks and multi-purpose vehicles, as well as the production of automotive components such as absorbers, electronic fuel injection parts, die-casting for engine heads, and autometers, in China.
We also have a joint-venture company, Shandong Silverstone LuHe Rubber & Tyre Co Ltd to manufacture all-steel radial truck tyres, radial passenger and light truck tyres for the Chinese and export markets.
The Group’s Property Division has completed the 12-storey Parkson Tower in Beijing and the 49-storey Parkson Tower in Qingdao.
Platform for Global Market
China’s economy today has entered its take-off stage with a population of 1.3 billion, representing an enormous market. Her economic and consumption potential are immense. China not only has a huge market for consumption, but also an enriched market for human resources, production and supply of raw materials.
Any country that has trade or economic or investment relationships with China will be able to reap the benefits of international trade and economies. Hence, China has become a global major trading partner and haven for global investors and international centre for competition.
Based on the above factors, any business corporation which has gained success in China will be able to command a high level of international competitiveness. This will enable them to have the advantage to move globally and be able to command the global market. As such, China is a platform for global marketing strategy.
China’s entry into WTO has created more advantages than disadvantages for foreign investors in China. In the long run, this will bring more advantages. As a nation of huge consumption, China is able to stimulate global economic growth effectively. It is also a supplier’s market for production materials. As more areas and markets are opened in China, more foreign competitors will enter the Chinese market, generating more intense competition and bringing more global players into China.
In view of this, our Group has to continually improve our productivity and competitiveness in the increasing competitive Chinese market.
Conclusion
To sum up our 14 years venture and experience in China, I may use the Chinese analogy to describe my feelings, that is "sweet, sour, bitter and spicy". We have faced numerous obstacles and frustrations in the course of our venture into China. Some of our projects were successful, some were not. The most important thing is that you have to be sincere and trustworthy (in Chinese it is called 诚信）. Don’t ever try to be deceitful, for that won’t help you in the long run. In addition, you have to be well-prepared before you step into China’s market. Opportunities are bountiful but you have to seize them at the right time in the right place. |