China Industry

TikTok Considers Changes to Distance App From Chinese Roots — Wall Street Journal

Leave a Comment / July 11, 2020

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ByteDance Ltd. is considering changing the corporate structure of its popular short-video app TikTok, as it comes under increasing scrutiny in its biggest markets over its Chinese ties.

Senior executives are discussing options such as creating a new management board for TikTok or establishing a headquarters for the app outside of China to distance the app’s operations from China, said a person familiar with the company’s thinking.

TikTok, which has shot to global fame over the last two years thanks to its catchy dancing and lip-syncing videos, is owned by Beijing-based ByteDance, one of the world’s most valuable technology startups. ByteDance, whose secondary shares have valued the firm at $150 billion in recent weeks, counts big-name U.S. investors such as Coatue Management and Sequoia Capital among its backers.

The app has seen a surge in downloads as the coronavirus kept millions of people locked up in their homes and eager for distractions. About 315 million users downloaded TikTok in the first quarter of the year, the most downloads ever for an app in a single quarter, according to research firm Sensor Tower, bringing its total to more than 2.2 billion world-wide.

But as TikTok grows in popularity—and an increasingly assertive Chinese government raises hackles in foreign capitals—regulatory pressure on the app is intensifying.

Officials in several countries have expressed concerns with the large volumes of user data TikTok collects, with some speculating that ByteDance could be compelled to share it with the Chinese government. TikTok has repeatedly denied receiving Chinese government requests for user data and said it wouldn’t respond if asked.

The U.S. State and Defense departments already prohibit employees from downloading TikTok on government devices. On Tuesday, Secretary of State Mike Pompeo hinted at a possible ban for TikTok and other Chinese apps during an interview with Fox News.

In Australia, the chair of a legislative committee looking into foreign interference through social media named TikTok among the platforms that might be called to appear.

“What’s needed is a really clear understanding from the platforms about their approach to privacy and their approach to content moderation. That’s one of the objectives of this inquiry,” Jenny McAllister, the chairwoman of the committee, told an Australian radio station on Monday.

The government in India, one of TikTok’s largest markets, banned the app over cybersecurity concerns following violent clashes along the two countries’ disputed border.

Most recently, TikTok surprised observers by reacting more strongly than Western tech companies to Beijing’s imposition of mainland-style internet controls in Hong Kong.

Where Twitter Inc., TWTR 0.88% Facebook Inc., FB 0.38% and Alphabet Inc.’s Google said they would pause responses to data requests from Hong Kong police, TikTok pulled out of the city entirely—a move some describe as part of the effort to distance the app from China.

“ByteDance is the first of China’s tech giants to make it big outside China, but the company that is the envy of China’s tech world is finding that success has a higher price perhaps than failure,” said Peter Fuhrman, the chairman of investment advisory firm China First Capital.

ByteDance managed to outperform its more established Chinese peers such as Alibaba Group Holding and Tencent Holdings in their quests to go global despite spending less on investments, he added.

ByteDance’s discussions about changing how TikTok is run are still in their early stages, but setting up an independent TikTok management board would allow a degree of autonomy from the parent company, the person familiar with the firm’s thinking said. This person wasn’t aware of any discussions around a corporate spinoff.

TikTok had also been considering opening a new global headquarters as early as December, The Wall Street Journal reported at the time. Singapore, London and Dublin were considered as possible locations. Recent events accelerated such plans, the person said.

TikTok currently doesn’t have a global headquarters. Recently installed Chief Executive Officer Kevin Mayer is based in Los Angeles.

The hiring in May of Mr. Mayer, a longtime Walt Disney Co. executive, put an American face on the Chinese company, whose website lists offices in 11 cities world-wide—none of them in China. The company says it doesn’t allow Chinese moderators to handle TikTok content.

ByteDance nevertheless has a long way to go to convince its critics. Any change to the corporate structure has to be significant enough to separate TikTok from any entanglements with mainland China, and has to cut off mainland Chinese staff from accessing user data, said Fergus Ryan, an analyst at the Australian Strategic Policy Institute. TikTok’s privacy policy says that user data can be accessed by ByteDance and other affiliate companies.

“Will the new structure be designed so as to remove any leverage Beijing can have over it? I find that hard to imagine,” Mr. Ryan said.

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https://www.wsj.com/articles/tiktok-considers-changes-to-distance-app-from-chinese-roots-11594300718?mod=hp_lead_pos7

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Fever-Detecting Goggles and Disinfectant Drones: Countries Turn to Tech to Fight Coronavirus — Wall Street Journal

Leave a Comment / August 9, 2020

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Drones spray disinfectant over South Korea. Police wear thermal imaging goggles to detect fevers in China. And a chatbot fields coronavirus questions in Australia.

The tech industry has long touted how ubiquitous connectivity, flashy gadgets and big data can improve people’s lives. The novel coronavirus epidemic is putting that bold promise to the test.

Health officials across Asia-Pacific, home to the first waves of virus contagion, have sought to repurpose existing technology to combat the fast-spreading virus. They are using smartphone-location tracking to piece together movements of suspected cases, developing government-run apps to monitor individuals’ health and keeping an eye on people’s temperature in the street with thermal goggles.

These new responses supplement traditional tactics such as quarantining sick people and canceling mass public events. But the tech-savvy tactics have yet to demonstrate broadly whether they are more game-changer than gimmick. Still, countries elsewhere might look to these solutions as the epidemic spreads.

The global number of confirmed coronavirus cases rose above 110,000 on Monday, according to data compiled by Johns Hopkins University, with infections found in 108 countries and regions.

In South Korea, the country hit hardest by the virus after China and Italy, the government rolled out a “Self-Quarantine Safety Protection” tracking app to keep digital eyeballs on the roughly 30,000 people officials told to stay home for two weeks. If a person brings their phone out of the permitted area, a mobile alert gets beamed to the individual and their government case officer.

The technology comes with a rub: It isn’t available on Apple Inc.’s iPhones until March 20. The app only works on handsets that run Google’s Android operating system used by hometown brands, Samsung Electronics Co. and LG Electronics Inc. Voluntary downloads since Saturday’s launch have been low, a government spokesman said.High-Speed Trains, International Flights: How the Coronavirus Spread

In Singapore, a Southeast Asian country hit in the early stages of the virus outbreak, health officials are asking citizens to monitor their own movements with the QR code, the black-and-white bar code used for mobile payments. A scan of these codes, found in taxis, office lobbies, tourist attractions and colleges, bring people to a webpage where they are asked to input their names, contact details and on occasion declare their health status. The voluntary scans allow authorities to reverse engineer a citizens’ whereabouts in case they fall ill or come into contact with a patient.

In Singapore’s Nanyang Technological University, where students, staff and visitors scan such bar codes to leave a digital trail of the locations they visit in the university, the data helped the university probe whether any of their 33,000 students had come into contact with a cleaning contractor who worked in the school after that person was diagnosed with Covid-19, said Tan Aik Na, a senior vice president at the university.

The system has limits. Claudia Thong, a 21-year-old Singapore university student, scans QR codes pasted on the front doors and interiors of classrooms each time she attends lessons. Some students, however, can’t be bothered to scan the codes, she said. Faculty and staff have been asked to remind their students and guests to perform the QR code check-in, the university said in a statement.

Australia’s health department directs worried citizens to a virtual assistant named “Sam.” But inquiries for “coronavirus” go unrecognized, with the site suggesting the correct spelling is the two-word, “corona virus.” A follow-up question about anxieties relating to “corona virus” produced suggestions that had nothing to do with the respiratory illness.

The chatbot will soon be updated to refer people to Covid-19 resources, an Australian health-department spokesman said.

In China, where the largest Covid-19 outbreak has occurred, cities have deployed a variety of eye-catching technologies to diagnose and contain illness. Through measures such as social distancing and isolation, China has managed to limit the outbreak mostly to Hubei province, where the infectious disease emerged and where the majority of cases have occurred.

Unmanned aerial vehicles, typically used to spot forest fires or for police surveillance, can now scan crowds in China and spot someone hundreds of feet away running a fever, said Kellen Tse, deputy general manager for Shenzhen Smart Drone UAV Co., a drone company working with two Chinese provinces. The drone, which uses thermal imaging, sends alerts about those unwell to on-the-ground officials.

“China is unlike other countries,’ Mr. Tse said. “We have a large population, that’s why we’ve turned to technology to be more efficient.”

In Shanghai, digital devices are attached to the doors of those sequestered, according to the city’s state-television channel. People are allowed to go out to empty their trash and pick up deliveries, but unauthorized door movements trigger an alarm to the neighborhood police station, a policewoman told the broadcaster in an interview.

Chinese technology firm Baidu Inc. said this month that it helped develop an algorithm for Beijing subway officials to single out commuters not wearing masks. The image-recognition algorithm, which Baidu developed and tested seven days after a request from the city’s metro administration, runs on the video feeds from subway cameras and flags individuals without a mask or who don’t wear one properly.

Shenzhen, China’s tech-manufacturing center, requests that drivers entering the city scan a QR code and leave their contact details and travel history. Police officers wear thermal helmets and goggles to identify pedestrians who may be unwell, the Shenzhen government said on social media.

But the new-age tactics have their limitations. Commercial drones can only fly for about 20 minutes before needing a lengthy recharge, and the tech-heavy defenses are expensive, said Peter Fuhrman, a Shenzhen resident and chairman of China First Capital, a boutique investment bank. He credits the conventional response of the masses of volunteers and paid monitors deployed in Chinese neighborhoods with thwarting the virus.

“Fittingly, people, not machines, made all the difference here,” said Mr. Fuhrman, who has stayed in Shenzhen since the country’s outbreak began in January.

In South Korea’s hard-hit city of Daegu, private drone companies have been deployed to help disinfect public places at the local government’s request. A single drone can load around 2.5 gallons of disinfectant and spray an area of up to 105,000 square feet—or about the size of a typical Walmart store.

“It takes about 10 to 12 minutes to use it all up,” a Daegu city official said.

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https://www.wsj.com/articles/fever-detecting-goggles-and-disinfectant-drones-countries-turn-to-tech-to-fight-coronavirus-11583832616?mod=hp_lead_pos12

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“The Tough Battle to Bring Western Brands to China” the Financial Times

Leave a Comment / August 9, 2020

When John Zhao sealed the £900m takeover of the UK’s PizzaExpress in 2014 he burnished his reputation as a pioneer in China’s private equity industry. Two years later Hony Capital, his buyout firm, ploughed money into WeWork as the New York shared-office provider set its sights on an aggressive expansion in China.


Both deals shared a simple premise: take well-known western brands to China and they will flourish. “We have capital; we have a huge market to give access to,” Mr Zhao said shortly after the capture of PizzaExpress, which set a record for a Chinese buyout deal in the UK.


The acquisition was one of a wave of Chinese private equity investments over the past decade but few firms were as ambitious as Hony in their targets. Spun out of state-backed Legend Holdings in 2003, Hony shot to prominence through a series of restructurings of other state-owned groups. As it grew, so did its appetite for higher-profile, cross-border investments.

However, almost two decades on, Hony’s breezy confidence that China’s increasingly wealthy middle class would be ready-made consumers of all western brands has proved misplaced.


PizzaExpress restaurant openings in China have lagged behind an ambitious goal while local, lowercost competitors have lured customers away. Confidence that middle class would eat up imported names such as PizzaExpress prove misplaced.

This lacklustre start in China, combined with rising costs and a slowing casual dining market in the UK, left PizzaExpress with a £1.1bn debt pile that has set the scene for a restructuring battle between Hony and other bondholders.

After a calamitous 2019 in which WeWork was rescued by Japan’s SoftBank, its biggest backer, the New York-based company has ditched its leasing model in many cities, laid off thousands of staff and struggled with a particularly poor performance in China.

“The ‘can’t-miss’ strategy continues to do just that,” said Peter Fuhrman, chairman and chief executive at Shenzhen-based investment bank China First Capital. “Chinese investors and corporates have mainly fizzled when buying and localising western consumer brands.”

Other Hony investments — including the Beijing-based bike-sharing business Ofo, which collapsed in late 2018 — have soured, causing competitors to rethink importing western brands to China.

Chinese business history is littered with cases of western multinationals making the opposite mistake. UK retailer Marks and Spencer closed its Shanghai stores in 2017 after its combination of clothing and imported food confused local shoppers. US electronics retailer Best Buy retreated from China in 2014 after struggling to compete with cheaper domestic competitors.

But Chinese private equity groups appeared undeterred. They raised $230bn of capital between 2009 and 2014, according to investment bank DC Advisory.

Nanjing-based Sanpower largely flopped with its buyout of high-end retailer House of Fraser in 2014 and its failed attempt to expand the UK retailer across China. Bright Food, the state-owned Chinese group that bought a 60 per cent stake in Weetabix in 2012, failed to make the UK breakfast dish popular in China and eventually had to sell the brand in 2017.

“Four years ago everyone thought [buying foreign brands and bringing them to China] was the best thesis — but a lot of people got burnt,” said Kiki Yang, the partner leading Bain & Co’s Greater China private equity practice. “It’s not easy to bring something with no brand awareness to China. In reality, the success rate is very low.”

People who know Mr Zhao have said he was one of the first serious Chinese investors to have a solid grounding in the way deals were done in the US while also enjoying deep ties to state-owned groups, putting him in an enviable position at the advent of the Chinese private equity industry.

In its early days, that helped Hony become a rare channel connecting investors such as Goldman Sachs and Singapore’s Temasek with lucrative state deals that were otherwise inaccessible to foreign capital.

The PizzaExpress deal was a turning point for Hony and
other investors in the sector.

By 2014, the group had completed several successful cross-border deals, including an investment in Italian concrete producer Cifa. But the takeover of a popular British restaurant chain won instant global attention for Hony and Mr Zhao, who had spent most of the 1990s working at Silicon Valley technology companies such as Vadem and Infolio.

Hony’s investment in PizzaExpress came just as the UK’s casual dining market began to suffer from oversupply. It was also beginning to face stronger competition from local restaurants in China, a sign the UK brand name meant little to many Chinese diners.

PizzaExpress originally intended to open 200 outlets over a five-year period. So far it has launched about a dozen restaurants in the mainland, giving it a total of about 38, according to its website. In its annual results in April, the chain admitted it had “experienced challenges in China as we face intensifying competition from local brands”.

Without the promised growth in China to cushion the decline in the UK market, PizzaExpress has been pushed towards a debt restructuring process, cementing the deal’s position as an emblem of troubled Chinese investments overseas.

 “Every time you say ‘China cross-border’, people think of PizzaExpress,” said one senior Chinese private equity executive. “It’s become a laughing stock — and bad for the reputation of China PE.”

PizzaExpress, Mr Zhao and Hony declined to comment.

As it seeks to resolve PizzaExpress’s problems, WeWork’s near collapse has inflicted further damage on Hony’s reputation. Hony and Legend Holdings led a $430m investment round in WeWork in 2016, and Mr Zhao became a member of WeWork’s board and later a consultant to its China business. SoftBank and Hony led a $500m investment round a year later.

With Mr Zhao acting as a consultant, WeWork expanded aggressively across the country, buying Chinese rival Naked Hub for $480m in cash and stock in 2018. Yet demand for office space fell in 2019, leaving some of its new areas of business virtually empty.

For example, in the western Chinese city of Xi’an, nearly 80 per cent of its desks were vacant, the FT reported in October. In the bustling start-up hub of Shenzhen in southern China, 65 per cent of its 8,000 desks were vacant.

WeWork declined to comment.

The poor performance of the business in China has left investors questioning how one of China’s private equity superstars could lead the group so far off course, according to people familiar with the matter.

“My impression is that Hony is not doing well these days,” said Liu Jing, a professor of accounting and finance at Cheung Kong Graduate School of Business in Beijing. “The economy has shifted to technology and they have lost their edge.”

https://www.ft.com/content/f735c956-15b6-11ea-9ee4-11f260415385


China and Ireland: Building a Powerful High-Tech Partnership. Enterprise Ireland Ambition Asia Conference, Dublin June 2019

Leave a Comment / June 25, 2019

Enterprise Ireland, the Irish government export development agency, held a conference in Dublin earlier this month to promote more intensive collaboration between businesses in Ireland and China, particularly in high-technology. I was invited to give a keynote speech, titled “China and Ireland: Building a Powerful High-Tech Partnership”. You can watch the first six minutes by clicking here.

Many thanks to my friend and amateur cinematographer Elaine Coughlan, an Enterprise Ireland board member as well as managing partner at Altantic Bridge Capital. Elaine has an outstanding track record as a tech entrepreneur and investor, in Silicon Valley, Ireland and China. I was also honored to be on a panel Elaine moderated.

The Ambition Asia Pacific conference brought together about 300 business leaders from Ireland, China and elsewhere across Asia.

Ireland is the only country in the European Union that has a trade surplus with China. The country stands to benefit greatly from Brexit, as international tech companies move European operations out of the UK and to the only EU Eurozone country with English as its native language. Two other big plusses: Ireland is a business-friendly place with about the lowest corporate taxation rates around.

Enterprise Ireland has a great team in China, led by Mary Kinnane, Tom Cusack and Patrick Yau. I met executives from two of Ireland’s success stories in China, Decawave and Taoglas.

Small country. Big impact.

Chinese Education Startup Puts Western Teachers on Notice — Wall Street Journal

Leave a Comment / August 10, 2020

A Chinese education company backed by U.S. investors including Kobe Bryant is cracking down on how its Western teachers cover politically fraught topics.

VIPKid, one of China’s most valuable online education startups, has put hundreds of its mostly American teachers on notice for using certain maps in their classes with Chinese students, and has severed two teachers’ contracts for discussing Taiwan
and Tiananmen Square in ways at odds with Chinese government preferences,people familiar with the company say. Since last fall, teachers’ contracts state that discussing “politically contentious” topics could be cause for dismissal, according to one reviewed by The Wall Street Journal.

The moves highlight the balance a Chinese company must strike in fulfilling global aspirations while toeing Beijing’s line. Five-year-old VIPKid is currently in talks to raise as much as $500 million in new funding from U.S. and other investors that could value the company at roughly $6 billion, people familiar with the fundraising said.

 “A company must keep good relations with the government and ideology,” said Peter Fuhrman, chief executive of investment firm China First Capital . “But that can cause friction when you’re also courting foreign investors, expanding business overseas and employing a large American workforce.”

Beijing-based VIPKid says it has more than 60,000 teachers in the U.S. and Canada who teach English to more than 500,000 children ages 4 through 15, who live mostly in China. Teachers work as independent contractors and can earn between $14 and
$22 an hour. They must have a bachelor’s degree, at least one year of teaching experience and eligibility to work in the U.S. or Canada.

Curricula are provided, and teachers give English-language instruction, sometimes using geography or historical figures. VIPKid’s approach is consistent with maps and materials in the Chinese education curriculum, which calls Taiwan a part of China. Textbooks don’t mention the military’s suppression of the Tiananmen Square pro-democracy demonstrators in 1989, and discussion of it is forbidden.

A spokesman said VIPKid has “an elevated level of responsibility to protect the safety and emotional development of the young children on our platform.” The company expects teachers to understand cultural expectations, he said, adding it had to “make a difficult decision” to terminate the contracts of “an exceptionally small number of teachers” who “decided to ignore the needs of their students” and “the preference of their parents.”

Western companies including Gap Inc. and hotel giant Marriott International Inc. have been forced to apologize in the past for
online communications, websites or merchandise that angered Beijing or Chinese consumers on issues including Taiwan and Tibet.

Chinese education technology attracted $5.3 billion in investment last year, double the amount a year earlier, according to Dow Jones VentureSource data. VIPKid’s investors include U.S. hedge-fund firm Coatue Management LLC, venture-capital firm Sequoia Capital, Chinese social giant Tencent Holdings Ltd. and a venture fund co-launched by retired NBA star Kobe Bryant.

The company’s actions have rankled some teachers. Typically, these instructors have displayed maps of the world, including China, that they found on their own. Starting last fall, hundreds began receiving emails or calls from VIPKid stating their maps weren’t aligned with Chinese education standards, people familiar with the matter said. Teachers who refuse to adhere to the map standards could have their contracts terminated, after conversations with VIPKid. Map-related dismissals haven’t happened, said a person familiar with the company.

Will Rodgers, a 26-year-old American teacher based in Thailand, said he discussed Tiananmen Square twice during VIPKid lessons about famous Chinese landmarks. First, he told a 12-year-old student “the Chinese government jailed and killed
many people just for protesting.” He then showed a 15-year-old student photos and video footage of the protest, and his contract was terminated. Mr. Rodgers said he doesn’t agree with VIPKid’s stance, but doesn’t blame the company for ending his contract.

Another American teacher’s contract was terminated earlier this year after he told students that Taiwan was a separate country, according to people familiar with his case. A third teacher received a call from VIPKid after telling a student that Tibet, an autonomous region in China with a history of separatist activity, is a country, during a lesson on China’s neighbors, according to a
person familiar with the matter. He was told on the call he should refer to Tibet as part of China.

People familiar with VIPKid say it monitors classes for missteps over political content. Another person familiar with the matter said the company uses artificial intelligence to determine material students find engaging and to protect them from inappropriate behavior.

Some teachers and VIPKid investors say that education from foreign teachers, even if it is screened, can benefit students because they get exposed to other cultures. Rob Hutter, a founder and managing partner of Learn Capital, an early investor in VIPKid, said the company is trying to take a common-sense approach by teaching uncontroversial content.

“No matter what nation you’re teaching in, there are going to be things that we need to be thoughtful about,” he said. “Even in American classrooms, there are things you cannot discuss.”

“No matter what nation you’re teaching in, there are going to be things that we need to be thoughtful about,” he said. “Even in American classrooms, there are things you cannot discuss.”


https://www.wsj.com/articles/chinese-education-startup-puts-western-teachers-on-notice-11553160602?mod=hp_lista_pos3


Are US and China Decoupling? Guest Lecture at University of Michigan Ross School of Business

Leave a Comment / February 21, 2019

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I was honored and delighted to teach a class via video lecture at the University of Michigan Ross School of Business for third year, this time on the potential decoupling between the US and China, the competitive realignments as well as investment opportunities.

The lecture’s title: “Chimerica No More: Are China and the US Decoupling? How Will This Alter World Economics and Commerce?”

Thanks to Professor David Brophy and his class on Global Private Equity for the invitation an incisive questions.

This is a video link to the presentation. (Click here.)

This is a video link to the full two hour class. (Click here.)

This is the PDF of the presentation — without the animations. (Click here.)

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China Merchants Steams in to Compete with SoftBank’s Vision Fund — Financial Times

Leave a Comment / August 9, 2020

 

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China Merchants Group has been adopting new technology to resist foreign competitors for nearly 150 years. Founded in the 19th century, the company brought steam shipping to China so it could compete with western traders.

Now an arm of the Chinese state, CMG has been enlisted once again to buy up technology at a time when global private equity is vying for a share of China’s burgeoning tech market.

The country’s largest and oldest state-owned enterprise, CMG said this month it would partner with a London-based firm to raise a Rmb100bn ($15bn) fund mainly focused on investing in Chinese start-ups.

The China New Era Technology Fund will be launched into direct competition with the likes of SoftBank’s $100bn Vision Fund, as well as other huge investment vehicles raised by top global private equity houses such as Sequoia Capital, Carlyle, KKR and Hillhouse Capital Management.

“They have been very important to China in the past, especially in reform,” said Li Wei, a professor of economics at Cheung Kong Graduate School of Business in Beijing. “But you haven’t heard much about them in technology . . . It’s not too surprising to see them moving into this area, upgrading themselves once again.”

CMG is already one of the world’s largest investors. Since the start of 2015 its investment arm China Merchants Capital, which will oversee the New Era fund, has launched 31 funds aiming to raise a combined total of at least $52bn, according to publicly disclosed information.

But experts say little is known about the returns of those funds, most of which have been launched in co-operation with other local governments or state companies.

Before New Era, China Merchants Capital’s largest fund was a Rmb60bn vehicle launched with China Construction Bank in 2016. While almost no information is available on its investment activity, the fund said it would focus on high-tech, manufacturing and medical tech.

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CMG’s experience investing directly into Chinese tech groups is limited, although it has taken part in the fundraising of several high-profile companies. In 2015 China Merchants Bank joined Apple, Tencent and Ant Financial to invest a combined $2.5bn into ride-hailing service Didi Chuxing, a company that now touts an $80bn valuation. It also invested in ecommerce logistics provider SF Express in 2013.

Success in Chinese tech investing is set to become increasingly difficult as more capital pours into the sector.

“Fifteen billion dollars can seem like a droplet in China,” said Peter Fuhrman, chairman and chief executive of tech-focused investment banking group China First Capital, based in Shenzhen. “We’re all bobbing in an ocean of risk capital. Still, one can’t but wonder, given the quite so-so cash returns from China high-tech investing, if all this money will find investable opportunities, and if there weren’t more productive uses for at least some of all this bounty.”

CMG, however, has always set itself apart from the rest of the country’s state groups. It is unlike any other company under the control of the Chinese government as it was founded before the Chinese Communist party and is based in Hong Kong, outside mainland China. Recommended Banks China Merchants Bank accused of US discrimination

The business was launched in 1872 as China Merchants Steam Navigation Company, a logistics and shipping joint-stock company formed between Chinese merchants based in China’s bustling port cities and the Qing dynasty court.

Mirroring its New Era fund today, it was designed to compete for technology with foreign rivals. At that time it was focused on obtaining steam transport technology to “counter the inroads of western steam shipping in Chinese coastal trade”, according to research by University of Queensland professor Chi-Kong Lai.

Nearly a century later, after falling under the control of the Chinese government, CMG became the single most important company in the early development of the city of Shenzhen, China’s so-called “window to the world” as it opened to the west.

Then led by former intelligence officer and guerrilla soldier Yuan Geng, the company used its base in Hong Kong to attract some of the first investors from the British-controlled city into the small Chinese town of Shenzhen, which has since grown into one of the world’s largest manufacturing hubs.

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Its work in opening China to global investment gained CMG and Yuan, who led the company until the early 1990s, status as leading figures in the country’s reform era.

Today the company is a sprawling state conglomerate with $1.1tn in assets and holdings in real estate, ports, shipping, banking, asset management, toll roads and even healthcare. The company has 46 ports in 18 countries, according to the state-run People’s Daily, with deals last year in the sector including the controversial takeover of the Hambantota terminal in Sri Lanka and the $924m acquisition of Brazilian operator TCP Participações.

CMG did not respond to requests for comment. But one person who has advised it on overseas investments said the Chinese government was using it in the same way the company opened up Shenzhen to the outside world, helping “unlock foreign markets”.

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https://www.ft.com/content/e7e81928-7f57-11e8-bc55-50daf11b720d


 

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China aims for greater tech independence as the rift with America and Europe widens. Will it work? — Washington Post

Leave a Comment / May 30, 2018

 

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Under the Radar — Week In China

2 Comments / August 11, 2020

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When Google launched its email service in 2004, only people who had been invited to join the network could open Gmail accounts. The invite-only system made Gmail appear exclusive, so naturally more people wanted in. But it wasn’t a marketing ploy. Gmail had to limit membership because it didn’t have sufficient infrastructure to provide the service for everyone.

When OnePlus, a fast-growing Chinese smartphone brand, debuted in 2014, it adopted a similar tactic. Co-founder Carl Pei explained: “The invite system allowed us to scale our operations and manage our risks to help us grow more sustainably.” Essentially, it meant the four year-old company avoided overstocking. But, as with Gmail, by keeping the phone ‘exclusive’, it helped generate buzz.

This week OnePlus launched its seventh iteration, the OnePlus Six. Although it ditched the invite-only sales system in 2016, the company still keeps tight control over its distribution, forcing most purchases to be made online. But in India, where OnePlus made 35% of its total $1.4 billion in sales in 2017, the company has opened 10 physical stores to help sales and aftercare.

Vikas Agarwal, general manager at OnePlus India, claims OnePlus is now the “biggest Android premium smartphone brand” in the country. According to Counterpoint Research, the third and fourth most popular brands in India last year were Vivo and Oppo. Despite being competitors, the three brands are all linked to one man: Duan Yongping, the founder of BBK Electronics.

BBK (or Bu Bu Gao) was set up by Duan in 1995. It was the second household name Chinese brand Duan has created.

Born in 1961, Duan joined Zhongshan Yihua Group in Guangdong province in 1989 as the manager of a small factory. He used his position to establish a unit called Subor, which produced video game consoles in competition with Japan’s Nintendo.

The most memorable product made by Subor was an educational console, which featured a computer keyboard with ports for data cartridges and a couple of adjoining game controllers. The cartridges stored video recorded lessons to enable students to learn the English language by responding to prompts using the controllers.

The cheap console gave many young Chinese an introduction to computing and its popularity was reflected in Subor’s finances. When Duan joined Yihua it was Rmb2 million in debt, but by 1995 annual profit had exceeded Rmb1 billion ($157 million).

Despite the success Duan was only earning a meagre salary. He had lobbied Zhongshan Yihua to spin off Subor and give him a stake in the new enterprise, but he was rejected. It became a very public business dispute. The outcome: Duan left and founded BBK, taking a few promising team members with him.

Given his frustrations at Subor, Duan made sure he carved out a sizeable 70% stake in BBK for himself. The company began producing audio-visual products such as VCD and DVD players.

In 1999 and 2000, Duan became the highest bidder on state broadcaster CCTV’s annual auction of its prime-time advertising slots, splashing out Rmb300 million. The huge gamble paid off. BBK became a household name and subsequently the leading maker of VCD players.

Duan was quick to see the potential of mobile phones and later the mobile internet. BBK’s Oppo and Vivo were initially derided as cheap imitations of Apple’s iPhone. But through smart marketing the pair became amongst the country’s best-selling smartphones (see WiC358 for our analysis of Oppo’s rise). In 2016, sales of the two brands actually bumped the iPhone out of China’s top three positions.

More than a decade earlier Duan had spoken to Harvard China Review about his business philosophy: “I am never afraid to follow others. Actually my business has never been an initiator of an industry. Instead, we analyse vulnerabilities of the leading companies in a certain industry and then try to establish our own stronghold.”

This ethos likely contributed to the establishment of OnePlus, which was co-founded in 2013 by Oppo’s former vice president Pete Lau. The company drew comparisons to Xiaomi at its launch, because both produced low-price premium smartphones with sales made exclusively online.

Lau was an early BBK employee, joining in 1998. According to Medium, Lau paid a visit to his mentor and former boss Duan to seek advice before initiating OnePlus. Duan’s pedagogical stature is one of the many reasons he’s sometimes dubbed “the Chinese Warren Buffet” and why Lau looked for his backing.

Peter Fuhrman, founder and chairman of Shenzhen-based advisory firm China First Capital, has followed Duan’s business career and admires what he has achieved. As he points out, “No one has succeeded for so long, or so well, in such a brutally tough global industry as Mr Duan. He’s earned a spot among the business immortals of the past century. Only he and Samsung managed the transition that left Blackberry, Nokia, Sony Mobile, Motorola as roadkill. He rose to the top originally by making simple, cheap feature phones, then more or less chucked that whole business away to create and back three new companies for the smartphone industry, Oppo, Vivo and OnePlus. All are doing outstandingly well. Their success is built on another aspect at which Duan excels as few, if any ever have – creating a hugely-efficient, high-quality manufacturing base in Dongguan turning out phones for all three, backed by what may well be the world’s most efficient global electronics supply chain.”

Duan is evidently happy to be compared with Buffett. In 2006, he paid $620,100 to have lunch with the Sage of Omaha. Duan told media after the charity luncheon, “I had already learned a lot from Buffett, so I was hoping for a chance to thank him.”

Having emigrated to the US in 2001, Duan has been taking a more active interest in managing his own money, rapidly growing his equity portfolio.

An initial investment was a $2 million cash injection into NetEase. The firm had almost gone bust following the dotcom crash and its share price had plummeted to just $0.80. According to China Investor, Duan determined that the company still had potential, so he took the plunge. Within two years he’d made a return of 100-times on his investment.

Duan also made a large investment in GE after its shares slumped following the 2008 financial crisis, buying shares at $6 each and quickly doubling his money.

His steely nerves ensured he held onto his stake in Kweichow Moutai when the baijiu maker’s stock price halved in 2014. Duan entered at Rmb180 in 2012; today Moutai trades at over Rmb700.

“The money I’ve earned on the back of investments is so much more than what I earned from 10 years of doing business,” he surmised. According to the latest Hurun report, Duan is now worth $1.3 billion – but there are some in China who think his wealth could be many multiples of that Hurun estimate, and he might even be one of China’s richest men.

It’s hard to know: many of his investments aren’t public. But in Chinese business circles few would disagree that he is shrewd at finding and backing talent.

For instance, also present at the 2006 Buffett lunch was Colin Huang Zheng, who would later found Pinduoduo, one of China’s 164 unlisted unicorns. The e-commerce platform has been described as the fastest growing app in the history of the Chinese internet (see WiC404), and Huang has long been viewed as a key Duan protégé.

“He is above all a great manager and motivator of people, of putting strong people in leadership positions and then letting them get on with their business, with minimal intervention from him at the top,” comments China First Capital’s Fuhrman. “From hands-on executive to hands-off semi-retired chairman, Duan has excelled across his career in very different roles.”

Despite his successes in the business and investment fields, it seems Duan would rather be remembered for his altruism, claiming “Charity is my business, investment is my hobby.” In 2005, Duan and his wife established the Enlight Foundation, through which they’ve provided scholarships to their respective alma maters. In 2006, Duan and NetEase founder Ding Lei made a $40 million donation to Zhejiang University.

But surprisingly the two people who likely won’t be receiving handouts from the magnate are his children. According to Phoenix News, Duan has said: “So much of my happiness in life has come from the process of earning my wealth. I don’t want to deny my children that same happiness.”

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As published by Week in China

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China: Qualcomm’s $44 Billion Purchase of NXP Has ‘Hard to Resolve’ Issues — Wall Street Journal

Leave a Comment / August 11, 2020

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BEIJING—China’s antitrust regulator gave an initial pessimistic review of Qualcomm Inc.’s $44 billion purchase of NXP Semiconductors NXPI -0.15% NV, raising questions about a critical deal for the American company and whether trade friction with the U.S. is playing a role.

A spokesman for China’s Commerce Ministry said Thursday that a preliminary review turned up “related issues that are hard to resolve, making it difficult to eliminate the negative impact.”

Speaking at a regular media briefing, the spokesman, Gao Feng, didn’t elaborate on the specific findings other than to say the agency looked at the deal’s impact on competitors and the market and examined Qualcomm’s QCOM -0.22% proposed remedies. He didn’t close the door on an eventual approval, promising a fair review of Qualcomm’s application.

“Made in China 2025” is Beijing’s industrial plan to dominate high-tech industries including robotics, aerospace and computer chips. The Trump administration argues China is using the plan to give its tech companies unfair advantage over foreign rivals. But what is it exactly?

Qualcomm didn’t immediately respond to a request for comment.

Mr. Gao’s remarks are the latest move in Qualcomm’s long discussions with Beijing. Still, the bleak initial assessment comes amid a tumultuous back-and-forth between Washington and Beijing that is making the technology sector a flashpoint in the countries’ brewing conflict on trade.

Earlier this week, the U.S. banned a large Chinese telecommunications equipment maker, ZTE Corp. , from purchasing American technology for seven years, saying the company breached an agreement reached last year to settle allegations it violated sanctions by selling gear to North Korea and Iran. The punishment is seen as potentially crippling for ZTE. It is also likely to hurt its American component suppliers, including Qualcomm, which provides chips for smartphones.

“China wants very much to flex its muscles. It can certainly inflict pain on one large U.S. company, Qualcomm,” said Peter Fuhrman, chairman and chief executive officer of investment and advisory firm China First Capital. He said current tensions make this “the fraughtest moment in the 30-year history of U.S.-China technology trade and mutual reliance.”

Ultimately, Mr. Fuhrman said, China’s huge mobile-phone and auto industries in particular depend on Qualcomm and NXP, so an agreement with the regulators is likely to be struck.

Qualcomm has been waiting for China to approve the purchase of the Dutch company NXP, having secured permission from the eight other major antitrust regulators around the globe. The deal is seen as crucial to San Diego-based Qualcomm, which needs to look for growth beyond its dominance in the smartphone sector; NXP specializes in making chips for automobiles, an area that is growing rapidly.

On Wednesday Qualcomm said it began laying off an unspecified number of employees in a move to fulfill a promise to boost profit by shedding $1 billion in expenses. The layoffs are part of a cost-reduction program unveiled in January intended to convince investors of the company’s prospects as it fended off an acquisition from Broadcom Ltd. , which was then based in Singapore, that was later quashed by President Donald Trump.

In recent weeks as Washington and Beijing have traded tit-for-tat threats over trade, the Commerce Ministry has slowed its review of the deal, according to people familiar with the matter.

‘China wants very much to flex its muscles. It can certainly inflict pain on one large U.S. company, Qualcomm.’

—Peter Fuhrman, chairman and chief executive officer of China First Capital

At a 45-minute briefing to a crowded room of reporters, Mr. Gao touched upon ZTE and the trade battle as well as Qualcomm’s application. By going after ZTE, he said, “The action targets China. However, it will ultimately undermine the U.S. itself.” He said the U.S. is risking “tens of thousands of jobs and shaking international confidence in the U.S. business environment.”

Mr. Gao also urged the U.S. government not to misjudge China’s resolve in defending its interests on trade.

The Trump administration has criticized Beijing over what the U.S. says are unfair practices leading to a trade imbalance that last year reached $375 billion in China’s favor. The Trump administration wants the gap reduced by $100 billion and this year placed tariffs on a range of Chinese goods and threatened to impose them on $150 billion more.

Beijing has vowed to respond in kind. This week, it placed temporary penalties on imports of U.S. sorghum, as part of a strategy to target the Farm Belt and other parts of President Trump’s political base. Soybeans, cotton and liquefied propane are also on a target list for tariffs.

Washington and Beijing have tussled over technology in recent years, with both governments alleging that each other’s products might enable espionage and damage national security. Efforts to harden those perceived vulnerabilities have also fed accusations of protectionism, and as overall tensions on trade have risen, technology has taken center stage.

Huawei Technologies Co., a Chinese national champion and the world’s largest provider of telecom equipment, acknowledged this week that after years of difficulties in the U.S., it is refocusing energies on most of the rest of the world.

The U.S. Federal Communications Commission approved a measure this week that would bar wireless carriers in the U.S. from using government subsidies to buy telecom gear from Chinese manufacturers. The U.S. trade representative’s office also said earlier this week that it is considering retaliation for China’s restrictions on U.S. providers of cloud computing and other services.

Qualcomm has been caught in the middle. The company relies on China for a major part of its business. As the Commerce Ministry’s review of its proposed purchase of NXP, Qualcomm resubmitted its application on Monday ahead of a Tuesday deadline. The move effectively resets a timetable for a decision and gives Chinese regulators an additional 180 days to review the deal, people familiar with the procedure said.

—Lin Zhu and Yoko Kubota in Beijing, and Liza Lin i Shanghai

https://www.wsj.com/articles/qualcomms-44-billion-purchase-of-nxp-has-hard-to-resolve-issues-china-1524108990

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China’s Technology Future and What It Means for Silicon Valley — Bay Area Council Research Report

Leave a Comment / November 29, 2017

 

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The Bay Area Council Economic Institute, the leading think tank and public policy organization in the Silicon Valley, has just published a comprehensive and timely research report on Chinese innovation, titled “China’s Technology Future and What It Means for Silicon Valley“. The author is Sean Randolph, Senior Director at the Institute.

You can download a copy of the complete report by clicking here.

Sean was kind enough to seek out my views on this topic and we shared a lively dialogue, both in person here in China, and by email once he returned to San Francisco.

The report does an excellent job contrasting China’s overarching future goals in technology and innovation with the current state of affairs. It takes a balanced view: “While recognizing China’s advances, it would be a mistake to think of China as a remorseless juggernaut sweeping everything in its path. Having a plan doesn’t guarantee success, and not everything works.”

The report looks deeply both at some of China’s leading technology companies — including the “BAT” along with Huawei and car-maker Geely — and more broadly at how Chinese companies, both state-owned and private, regions and universities all align themselves with broader national goals to upgrade the level of China’s indigenous innovation.

What does all this mean for Silicon Valley, the world’s most important and successful breeding ground for high-value innovation? It’s here, in offering answers and perspective, that the report achieves its greatest value.

Here are some particularly insightful passages:

“China’s relationship with the Silicon Valley/San Francisco Bay Area is unique, in part due to the deep historical and demographic ties between the Bay Area and China, but also because the region’s technology sector—the world’s largest—most highly concentrates the assets of technology, investment and expertise that relate to China’s goals to accelerate its own technological development.

Bay Area technology companies, such as Intel, Apple, and Cisco, and venture firms, such as Sequoia Capital, DFJ (Draper Fisher Jurvetson), and Kleiner Perkins, have been active investors in China for decades. Now, reversing the historic trend in which virtually all investment flowed from the Bay Area to China, Chinese companies have started sending investment capital and other resources to the Bay Area through mergers and acquisitions, equity investments, and the establishment of research and innovation centers and accelerator programs.”

The attraction of China’s market can be compelling, but [Silicon Valley] companies also must consider whether their core technology can be protected, and whether their position in the Chinese market can be sustained if that technology is compromised by competitors.While few US companies are leaving China, government policies and weak IP protection have caused many to keep their best technology at home and others to stay away.”

The report appears at an especially critical time in the development of US-China technology policy and investment. Congress is moving to tighten the CFIUS controls on Chinese technology investment in the US. China, meanwhile, is pushing ahead with new and more restrictive policies at home, leading to companies like Amazon selling off assets in China.

Let’s hope the tide reverses. A more open and reciprocal trade and investment relationship between China and the US would benefit both, benefit the world.

 

 

 

Amazon Sells Hardware to Cloud Partner in China — The Wall Street Journal

Leave a Comment / August 11, 2020

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Amazon Web Services is selling computing equipment used for its cloud services in China for as much as $300.8 million.
Amazon Web Services is selling computing equipment used for its cloud services in China for as much as $300.8 million.

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Amazon.com Inc. AMZN 0.68% on Tuesday said it has sold computing equipment used for its cloud services in China to its local partner, Beijing Sinnet Technology Co., in a move analysts said underscores the increasingly chilly atmosphere for foreign companies in the country.

Amazon Web Services said it took the step to meet new Chinese regulations.

”Chinese law forbids non-Chinese companies from owning or operating certain technology for the provision of cloud services,” AWS said. “As a result, in order to comply with Chinese law, AWS sold certain physical infrastructure assets to Sinnet, its longtime Chinese partner.”

The company said it remains committed to China and that customers would continue to receive AWS cloud services. It also said the deal didn’t involve any transfer of intellectual property.

Peter Fuhrman, chairman of technology investment bank China First Capital, said Amazon’s decision illustrates China’s tightened grip on companies providing internet services.

”The key policy brickwork is now done,” Mr. Fuhrman said. “The Chinese internet, in its broad entirety, will become even more comprehensively managed by the Chinese state.”

Mr. Fuhrman added that such protectionist moves will ultimately limit China’s access to the latest technology and could hurt its competitiveness over the long term.

Jim McGregor, chairman of the Greater China region for public-affairs consultancy APCO Worldwide, said the move should be viewed in light of China’s Made in China 2025 plan to promote domestic enterprises and technologies. ”China has a different plan and it has the power,” he said.

U.S. tech companies in China are dealing with a different world “and it would be corporate suicide not to acknowledge it,” he added.

Beijing Sinnet, in a regulatory filing late Monday, said it was paying up to 2 billion yuan ($300.8 million) for the assets to “comply with our country’s laws and rules and further improve the security and the service quality of the AWS cloud-computing service operated by the company.”

Early this year, China’s Ministry of Industry and Information Technology informed foreign companies with cloud ventures that new operating licenses would be applied by year-end. Amazon’s deal with Sinnet could clear the final obstacles for AWS to get such licenses, analysts from Citic Securities said in a note Tuesday.

Late last year, China’s MIIT also issued draft measures calling for tighter technical cooperation between foreign cloud operators and their local partners. The proposed rule change triggered complaints from more than 50 U.S. lawmakers, who in March protested in a letter to China’s ambassador to the U.S., Cui Tiankai, that the change would force U.S. companies to essentially transfer ownership and operations of their cloud systems to Chinese partners.

Officials with the MIIT had no immediate comment.

Amazon and other U.S. companies, including Apple Inc., have faced increased pressure in the country in recent months in the face of the Chinese government’s desire to control cyberspace.

In July, Apple said it would begin storing cloud data for its Chinese customers on a server run by a government-owned company, to comply with Chinese law. The data include photos, documents, messages and videos uploaded by mainland China users of Apple’s iCloud service.

Since a new cybersecurity law came into effect in June, U.S. tech companies have been constrained in their efforts to operate as they normally would globally, and this has led to inefficiency and a higher risk of cyberthreats, said the U.S.-China Business Council in a statement Tuesday.

In August, AWS was caught up in a Chinese government clampdown on tools that allow internet users to circumvent the country’s vast system of internet filters. In that instance, AWS customers were sent emails by Beijing Sinnet asking them to delete tools enabling them to bypass the filters. Some of the tools that clients use include virtual private networks, or VPNs.

Cloud platforms provide their users with data storage, computing and networking resources over the internet, reducing the need for on-site servers. China’s $2 billion public cloud market is set to grow to a $16 billion by 2020, according to estimates by Morgan Stanley analysts. A government policy push for enterprises to migrate to the cloud, better vendor offerings and falling costs will boost demand for such services, Morgan Stanley said.

In China, AWS faces strong local competition in the form of Alibaba Group Holding Ltd. and China Telecom Corp. Alibaba’s cloud unit held 40% of the country’s cloud infrastructure-as-a-service market, according to International Data Corp. research. Microsoft Corp. , the largest foreign provider in China, had 5%, while AWS has 3.8%.

Still, China’s market is in its nascent stage, and it is too early to crown industry champions, said Kevin Ji, a research director at Gartner, an industry research firm. With their strong product offerings, AWS and Microsoft are likely to prove formidable competitors to Alibaba in the longer run, he said.

As published in The Wall Street Journal.

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China Investing, The Pain and the Perks — Harvard Business School Global Alumni Lecture

Leave a Comment / October 10, 2017

 

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It was a delight and a privilege to give a talk on China investing to Harvard Business School’s global alumni organization. If you’d like to see the slide deck, please click here. The audio version of the lecture, done by worldwide webcast,  is also up on YouTube.

The topic was a big one — why have China investment returns so often failed to keep pace with the phenomenal growth in the country’s economy, and can investors do anything to improve the odds of success? Given an hour to discuss, I could only really scratch the surface.

A key takeaway: the past needn’t be prologue. Investing in China may prove less vexatious in the future. In part, that’s because of the growth of a mass affluent consumer market in China, a shift that plays to the strengths of many US, European and East Asian companies and institutional investors. Second, of course, everyone now can learn from past mistakes and misperceptions.

As I said in closing, “China will continue to amaze, inspire and stupefy the world. Chinese have done very well and will do better. At same time, those of us investing in China may do a little better here in years to come than we have up to now. More of the newly minted trillions in China just may end up sticking to our palms.”

 

 

 

Alzheimer’s: China’s Looming Health Challenges — The Diplomat

Leave a Comment / October 2, 2017

 

 

 

 

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Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners and strategic thinkers across the globe for their diverse insights into the U.S. Asia policy. This conversation with Peter Fuhrman – Chairman, Founder and Chief Executive Officer of China First Capital, Ltd. – is the 109th in “The Trans-Pacific View Insight Series.”  

With 9.5 million diagnosed Alzheimer’s sufferers in China, why is Alzheimer’s the country’s biggest future health problem?

I would broaden it to say that the treatment of chronic diseases, with Alzheimer’s at the forefront, is the largest future challenge to China’s national healthcare system. From a country that in living memory only offered a very rudimentary system of barefoot doctors, who were often nothing more than well-meaning but untrained quacks, China in 20 short years has expanded genuine healthcare coverage to all corners of the country, providing acute care and medications to the vast majority of its citizens. That’s an enormous achievement; one that’s done more good for more people than probably any other government initiative anywhere at any time. Chronic diseases, on the other hand, were never a focus, indeed never much of a problem. But, Chinese life expectancy has lengthened dramatically, thanks in part of the improvement in the delivery of acute health services. Chinese are now living as long as people in Europe and the United States. The result: China is already feeling the strain of millions of older ill folks with no real treatment options in place. The demographic die is already cast. Within 25 years, China will become a more geriatric society, where at least 25 percent of the population is over 65. Chronic disease will become commonplace, more prevalent than in any other country.

What cultural challenges hinder or help Chinese society in managing Alzheimer’s?    

The generation of people now growing old in China had limited expectations, as they mainly grew up in dire poverty. As they aged, they accepted more stoically that society couldn’t provide much assistance except for immediate medical emergencies. Their children and grandchildren, however, are constituted differently. They often have education and expectations similar to people in the West, including that there should be quality treatment options in China for every medical issue, as there are in the U.S., Europe, Japan, and elsewhere. They increasingly want better treatment for their sick parents, and will certainly expect even more for themselves when they grow older and are diagnosed with chronic diseases like dementia and Parkinson’s, or need extended care and rehabilitation after a stroke or heart attack, both quite common in China. There is still so little care available in China to fulfill this growing need.

What can China learn from the United States and Europe?

Probably the key lesson is to not to expect, as too many in the U.S. and Europe did, a big breakthrough in Alzheimer’s care, the development of drugs to arrest the progress or undo the damage of the disease. The sad reality is despite huge sums spent on research, we’re as far away from such a medical miracle as we were 20 years and at least $20 billion ago. Instead, China needs to foster the development of thousands of quality treatment centers for Alzheimer’s patients, to care for them according to the best global standards, to lengthen and enrich their lives. This requires along with lots of new buildings a huge number of trained doctors, geriatricians, specialist nurses, and aides.

Describe differences between Chinese rural and urban treatment of Alzheimer’s.

Quality healthcare in China is still available mainly in large national hospitals located in major cities. Though the number of rural Chinese with Alzheimer’s is large and growing fast, there is virtually no professional care available for them locally. The government is seeking to change this, not only for chronic diseases, to raise the standards of healthcare in small cities and rural townships, to relieve the huge disproportionate burden on the big urban hospitals.

Identify opportunities for the international healthcare industry in addressing China’s looming Alzheimer’s challenge?  

Over the next 40 years in China, there is no single area offering better investment fundamentals than chronic care, including the care of Alzheimer’s. Sober forecasts are, by 2045, there will be over 40 million Chinese with Alzheimer’s, four times the number presently. By then, it’s likely half the total number of Alzheimer’s cases worldwide will be here in China. As of today, there are fewer than 500 beds in China for patients needing specialist Alzheimer’s treatment. A French company, Orpea, has a first mover advantage, having already opened a world-class facility in Nanjing. In financial terms, quality Alzheimer’s and chronic care provides very solid returns. As or more important, though, is that the benefits will be captured also by Chinese society as a whole. This will certainly be one of those areas where investors will do quite well by doing good, by contributing to a China where the diseases of old age will be competently managed and families kept happy and intact for longer.

 

As published by The Diplomat

 

 

 

China’s Bold “One Belt One Road” Move To Dramatically Extend Its Power and Commerce in the Indian Ocean — The Financial Times

Leave a Comment / August 11, 2020

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Much has been said — but far less is understood — about the One Belt One Road initiative, the centerpiece of Xi Jinping’s expansive foreign policy. That Mr. Xi has ambitions to extend across Eurasia China’s commercial, political and military power is not in doubt. But, the precise details on OBOR remain just about as unclear now as they did four years ago when the policy was unveiled — which countries are included, how much cash China will invest or lend, where are the first-order priority projects, will any of the trillions of dollars of proposed spending achieve commercial rates of return? Questions multiply. Answers are few.

There is one remote corner of the planet, however, where the full weight of OBOR’s grand strategy and profit-making potential are coming into view. It’s in a small village called Hambantota along the southern fringe of Indian Ocean beachfront in Sri Lanka.

One of China’s largest and most powerful state-owned companies, China Merchants Group, with total assets of $855 billion, is in the final stages of completing the purchase for $1.1 billion of a 99-year lease for a majority stake in a seven-year-old loss-making deep-water container port. It was built for over $1 billion on a turnkey basis by Chinese state-owned contractors. It is owned and operated by the Sri Lankan government’s Port Authority.

I’m just back in China from a rare guided visit inside Hambantota port. Like other bankers and investors, we’ve felt the pinch as much of Chinese outbound investment has been cancelled or throttled back this year. Hambantota, though, is full steam ahead.

Hambantota’s future appears now about as bright as its present is dreary. On the day I visited, there was virtually no activity in the port, save the rhythmic wobbling of a Chinese cargo ship stuck in Hambantota for three weeks. Due to choppy seas and also perhaps inexperienced Sri Lankan port staff, the Chinese ship has been sitting at anchor, unable to unload the huge Chinese-made heavy-duty cranes meant to operate on the quayside.

Though the Chinese ambassador to Sri Lanka has pledged that Hambantota will one day resemble Shanghai, as of today, elephants in the nearby jungle are about as numerous as dockworkers or pedestrians. Tragically, the region was ravaged, and partly depopulated, by the Tsunami of 2004. China Merchants will take over management of the port within the next month or so. There is much to do — as well as undo. The Hambantota port, under Sri Lankan government management, has been a bust, a half-finished commercial Xanadu where few ships now call. The port has lost over $300 million since it opened.

China Merchants’ plan to turn things around will rest on two prongs. Its port operations subsidiary, Hong Kong-listed China Merchants Port Holdings, will take over management of Hambantota. It is the largest port owner and operator in China. Almost 30% of all containers shipped into and out of China are handled in China Merchants’ ports. The ports business earned a profit of $850 million last year. China Merchants has what the Sri Lankan government’s Hambantota port operator could never muster: the operational skill, clout, capital and commercial relationships with shippers inside China and out to attract significant traffic to Hambantota. China’s state-owned shipping lines deliver more containers than those from any other country.

In addition, China Merchants will enlist other large China SOEs to invest and set up shop in an 11 square-kilometer special economic zone abutting the Hambantota port. The SEZ was created at the request of the Chinese government, with the promise of $5 billion of Chinese investment and 100,000 new jobs to follow. China Merchants is now drawing up the master plan.

A who’s who of Chinese SOE national champions are planning to move in, beginning with a huge oil bunkering and refining facility to be operated by Sinopec as well as a large cement factory, and later, Chinese manufacturing and logistics companies. This “Team China” approach – having a group of Chinese SOEs invest and operate alongside one another — is a component of other OBOR projects. But, the scale of what’s planned in Hambantota is shaping up to be far larger. The flag of Chinese state capitalism is being firmly planted on this Sri Lankan beachfront.

Hambantota is only ten to twelve nautical miles from the main Indian Ocean sea lane linking the Suez Canal and the Malacca Straits. Most of China’s exports and imports sail right past. An average of ten large container ships and oil tankers pass by every hour of every day. From the Hambantota port office building, one can see the parade of huge ships dotted across the horizon. Along with transshipping to India and the subcontinent, Hambantota will provide maintenance, oil storage and refueling for shipping companies.

Sri Lanka is the smallest of the four Subcontinental countries, with a population of 20 million compared to a total of 1.7 billion in India, Pakistan and Bangladesh. It has one geographic attribute its neighbors lack — a deep-water coastline close to Indian Ocean shipping lanes and conducive to building large deep-water ports able to handle the world’s largest container ships and supertankers. This should make Sri Lanka the ideal transshipment point for goods and natural resources going into and out of the Subcontinent.

The Port of Singapore is now the region’s main transshipment center. It is three to four times as distant from India’s major ports as Hambantota. Singapore is now the world’s second-busiest port in terms of total shipping tonnage. It transships about a fifth of the world’s shipping containers, as well as half of the world’s annual supply of crude oil.

Even before President Xi first articulated the OBOR policy, Sri Lanka was already seen as a key strategic and commercial beachhead for China’s future trade growth in the 40 countries bordering the Indian Ocean. China and Sri Lanka have had close and friendly diplomatic ties since the early 1950s. Both style themselves democratic socialist republics.

Sri Lanka is the one country in the region that enjoys cordial relations not only with China but also the US, and the three other Subcontinental nations. Sri Lanka’s GPD is $80 billion, less than one-tenth the total assets of China Merchants Group. Sri Lankan per capita GDP and literacy rate are both about double its Subcontinental neighbors. While a hardly a business nirvana, it is often easier to get things done there than elsewhere in region.

The first port was established in Hambantota around 250 AD. It was for centuries, until Chinese emperors sought to prohibit Chinese junks from sailing the open seas, a stopping point for Chinese ships trading with Arabia.

China Merchants has been trying for four years to close the deal there. China Merchants Port Holdings is a powerful presence in Sri Lanka. It already built and operates under a 35-year BOT contract a smaller, highly successful container port in the capital Colombo. It opened in 2013. It’s one of the few large-scale foreign direct investment success stories in Sri Lanka. The future plan is for the China Merchants’ Colombo port to mainly handle cargo for Sri Lanka’s domestic market, while Hambantota will become the main Chinese-operated transshipment hub in the Indian Ocean.

Chinese SOEs are also in the throes of building a port along the Pakistani coast at Gwadar and upgrading the main ports in Kenya. The direction of Beijing’s long-term planning grows clearer with each move. If not exactly a Chinese inner lake, the Indian Ocean will become an area where Chinese shipping and commercial interests will more predominate.

During the Hambantota negotiations, the Sri Lankan government blew hot and cold. The country needs foreign investment and Chinese are lining up to provide it, as well as additional infrastructure grants and loans. Chinese building crews swarm across a dozen high-rise building sites in Colombo. Chinese tourist arrivals are set to overtake India’s. The main section of the unfinished highway linking Colombo and Hambantota was just completed by the Chinese.

The new coalition government that came to power in Sri Lanka in early 2015 has sometimes showed qualms about the scale and pace of Chinese investment. India has already signaled unease with the Chinese plans to take over and enlarge the port in Hambantota. Prior to signing the contract with China Merchants, the Sri Lanka government provided India with assurances the Chinese will be forbidden to use the port for military purposes.

China Merchants will effectively pay off the construction loans granted by the state-owned Export-Import Bank of China to the Sri Lankan government in return for the 99-year operating lease. China Merchants plans to invest at least another $1 billion, but perhaps as much as $3 billion, to complete Hambantota port and turn it into the key Indian Ocean deep-water port for ships plying the route between Suez and East Asia. Rarely if ever in my experience do OBOR projects have the crisp commercial logic of Hambantota. Assuming ships do start to call there, Hambantota should prove quite profitable, as well as a major source of employment and tax revenue for Sri Lanka.

As of now, there is almost no housing and no infrastructure in Hambantota, only the port facility, a largely-empty international airport and a newly-opened Shangri-La hotel and golf course. The airport and port were pet projects of a local Hambantota boy made good, Mahinda Rajapaksa. He was Sri Lanka’s president from 2005 to 2015, when he was voted out of office. In December last year, the port was taken over by a mob of workers loyal to the Rajapaksa. They took several ships hostage before the Sri Lankan navy sailed in to end the chaos.

The port will be able to handle dry cargo, Ro-ro ships transporting trucks and autos, oil tankers as well as the world’s largest 400-meter container ships. Hambantota should lower prices and improve supply chains across the entire region, and so drive enormous growth in trade volumes — assuming power politics don’t intrude.

China and India have prickly relations, most recently feuding over Chinese road-building in the disputed region of Doklam. India has balked at direct participation in OBOR, and complains loudly about its mammoth trade deficit with China, now running about $5 billion a month. Chinese exports to India have quadrupled over the past decade, in spite of India’s extensive tariffs and protectionist measures. Hambantota should allow India’s manufacturing sector to be more closely intertwined with Chinese component manufacturers and supply chains. That is consistent with India’s goal to increase the share of gdp coming from manufacturing, and manufactured exports, both still far smaller than China’s. But, India will almost certainly push back, hard, if Hambantota leads to a big jump in its trade deficit with China.

China’s exports may be able to come in via the Sri Lankan backdoor. India and Sri Lanka have a free trade agreement that in theory lets Sri Lankan goods enter the vast market duty-free. Chinese manufacturers could turn the Hambantota free trade zone into a giant Maquiladora and export finished products to India. This would flood India with lower-priced consumer goods, autos, chemicals, clothing. Bangladesh, Pakistan and Burma — smaller economies but friendlier with China — would likewise absorb large increases in exported Chinese goods, either transshipped from Hambantota or assembled there.

No area within OBOR is of greater long-term significance to Chinese commerce. Fifty years from now, if UN estimates prove correct, the population of India, Pakistan and Bangladesh will be about 2.3 billion, or about double where China’s population will be by then.

Some China Merchants executives are dreaming aloud the Thai and Chinese governments will close a deal to build a canal across Southern Thailand. This would shave 1,200 miles off the sea route from Suez to China. The preferred canal route across the isthmus of Southern Thailand is actually shorter than the length of the Panama Canal. The canal would re-route business away from Singapore and the Malacca Straits. The likely cost, at around $25 billion, could be borne by China without difficulty. Hambantota would grow still larger in importance, commercially and strategically.

For now, though, the Thai canal is not under active bilateral discussion. Not only does the ruling Thai junta worry about its landmass being cleaved in two, the governments of the US, Japan, Singapore would likely have serious reservations about altering Asian geography to enhance China’s sea power and naval maneuverability.

By itself, a Chinese-owned and operated Hambantota will almost certainly reconfigure large trade flows across much of Asia, Africa and Europe, benefitting China primarily, but others in the region as well. It is a disruptive occurrence. While much of China’s OBOR policy remains nebulous and progress uncertain, Chinese control of Hambantota seems more than likely to become a world-altering fact.

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As published in The Financial Times

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