From Concrete Shells to ‘His and Her’ Showers
The home improvement market in China is one to watch, reflecting China’s
ongoing reforms, booming as a sector and attracting the world’s multinationals.
China’s home improvement market is today worth RMB 17 billion (USD 2 billion),
having grown at 30% per annum over the past 5 years. With 400 million
households, the market could well be worth RMB 250 billion (USD 30 billion) by
2005. There are several reasons behind these developments.
In order to release SOEs from their social burden, Prime Minister Zhu Rongji
has introduced much needed housing reforms. These include the suspension of
housing subsidies, the establishment of a housing fund from which low interest
loans can be drawn, and the granting of local tax breaks for home purchases,
together encouraging home ownership in China. As the Chinese used to have no say
in their housing, they had no incentive to spend on improvements, but with the
increase in home ownership and rising incomes, the standard of housing has
become more important. The result is that many homes have been remodeled, and as
purchasing a home in China is likely to be a unique event, the trend has been
towards nicer things that work better and last longer. Furthermore, new
dwellings in China, reaching one billion square meters per annum, are sold as
‘shells’ and require full interior decoration by the purchaser. This expansion
in per capita living space, from 3.6 square meters in 1990 to 10 square meters
today, means more walls to paint, more floors to cover, and more furniture to
fill the space.
It is no wonder then that the multinational home improvement retailers have
entered the China market. The warehouse-retailing concept has transferred well
to China, winning homeowners away from market traders and small shops with
pledges of low prices and wider product ranges. The market is a competitive one,
and stores have had to find competitive advantages, most notably in the
provision of related services. For example, consultation on how to decorate
apartments has taken off, and as the Chinese prefer BIY (buy-it-yourself) to
DIY, so has the delivery and installation of products. The arrival of the
multinationals has been facilitated by the development of the domestic supplier
base, not just foreign hardware companies that have established joint ventures
in China, but also Chinese hardware companies with genuine rival products.
Although strengthened competition in recent years has led to cutthroat price
wars, stronger Chinese manufacturers have sought to differentiate themselves by
achieving higher standards in production and surface finishing, and investing in
R&D to improve aesthetics.
It is interesting to note that product ranges have been refined to cater to
local tastes. According to store managers, the elaborate 20-spray "his and hers"
shower units, complete with built-in karaoke machines, are a real hit with the
wealthy Chinese.
If you are interested in market
analysis studies in China, please contact
James Sinclair in our Shanghai
office (email: jsinclair@fiducia-china.com tel.:
(+86) 21-5298 1805).
Recruitment Challenges
Recruitment of Senior Executives in China may take different forms – as
elsewhere in the world. But the demands of an ever changing economy and the
sheer size of the country turn the recruitment and selection process into a
challenge for management.
One of the most significant trends nowadays is for the search to extend to
China proper, and in some cases Hong Kong, as the talent pool has increased
considerably. Depending on strategic considerations and the specifics of the
task to be achieved, the choice may concentrate on local executives and / or
expatriates. In the latter case, the selection of expatriates with China work
experience and proven achievements may provide distinct advantages over
expatriates from the head office or home country.
Another trend is that foreign and Chinese executive search firms are being
used more extensively. Not only has this approach proven effective for filling
key positions in China, but was also particularly advantageous when the vacant
position is in another province or if the assignment is sensitive – perhaps
replacing an existing manager.
If you are interested in using an
executive search firm in China, please click www.fiducia-china.com
to
read “Recruitment Challenges - Making the most of your headhunting resources”
by Ms. Vanessa Moriel, Fiducia Management Consultants, Shanghai office
M&A Surges in Mainland China
Gone are the days when foreign companies wishing to invest in China were
limited to forming joint ventures or starting with greenfield investments. They
now have the option to purchase operating Chinese businesses and may restructure
their existing investments in China through mergers, and spin-offs, that were
unknown or difficult achieve only a few years ago.
M&A is not confined to foreign investors. Domestic Chinese companies are
also merging with and acquiring one another, and the more successful among them
have begun to buy out foreign investors. The result of these developments is a
rapidly expanding Chinese M&A market, having grown 17.3 percent during the
first two months of this year.
Due to China’s accession to the WTO and its further liberalization, the
number and value of acquisitions will rise severely. Figures from the Statistic
Bureau show that the development in foreign investment in China this year has
been closely linked to the number of acquisitions. This is not surprising as
mergers and acquisitions account for 80 percent of global foreign investment,
higher than the 50 percent in developing countries. The percentage in China is
substantially lower but expected to grow dramatically.
However there are certain difficulties for foreign companies doing M&A
deals in China. These include the common issue of over-valuation of assets,
difficulties with interpreting mainland accounting standards, and binding
agreements that give foreign investors little room for flexibility or pull
out.
If you require further advice on
M&A in China, please contact
Thomas Thiele (email: tthiele@cdiglobal.com tel.: (+86) 10
6590 6108) in confidence
and read the article under www.fiducia-china.com Fiducia Management
Consultants
is a Member of CDI (www.cdiglobal.com), specialists in company
search.
Causes of Accounting Manipulation in China
At the end of last year, the China Securities Regulatory Commission (CSRC)
pushed hard for Western standards in response to a string of scandals in which
listed Chinese companies issued grossly inaccurate financial reports not
corrected by their local auditors. The most notorious case concerned a
biochemical company, Guangxia, which reported a net profit of 417 million RMB,
but which, according to CSRC investigators, had actually lost 150 million RMB in
2000. Other cases that have come to light in China included offences like
forging sales and bank deposits as well as falsifying debt, profit and loss.
However, the root causes of China’s accounting fraud plague are structural
and historical. First, China’s mostly small accounting companies are locked in
fierce competition at a time when audit business in Western economies is
increasingly concentrated among the large accounting companies. An accounting
company risks losing a client if its qualified opinion results in a customer’s
failure to gain a listing or suspension from trading. Second, China’s accounting
fraud is also a legacy of its planned economy, under which accounting was viewed
more as a paper game to meet official targets rather than a solid book-keeping
exercise. More than 40 percent of Chinese accountants are older than 50, meaning
they were trained under the planned economic system. Also to blame is official
leniency towards wayward accountants. While company officials increasingly face
the threat of criminal prosecution in fraud cases, administrative sanctions
remain the main regulatory weapon against accountants. Chinese courts are ill
equipped to handle complex cases involving allegations of creative accounting.
But as Ernst & Young’s China executive partner Alfred Sham put it:
“China’s endemic accounting fraud is no different from the early days of the US
securities market. There must be an educational period before the market works.
It’s just that we don’t give them time.”
FMC Events:
| 11/06 |
Mr. Thomas Thiele will represent CDI China as a speaker
at the
IBC conference "Profiting from Strategic Acquisitions in China- A
Case Study
Approach" ( www.ibc-asia.com
)
that will be held on in Beijing.
His topics&points will be:
- Value Creation through M&A in China - A Business Perspective
- Dynamics from the Chinese Market
- How Value Creation through M&A Works
- A Framework for Managing M&A Projects
- Financial Due Diligence Issues
-Business profitability
-Quality of
earnings in China
-Financial performance & analysis
-Targets
prospective & valuation
- Case Studies
Please click www.cdiglobal.com
for more information and registration for the IBC confernce on M&A in
Beijing. |
If you require advice on accounting matters in
China, please contact Thomas Thiele
in our Beijing office (email tthiele@fiducia-china.com tel: (+86)
10 6590 6108).
|
