LG Chem Plans to Increase Capacity
South Korea’s largest player in the chemical industry, LG Chem, announced plans to significantly increase its production capacity in China.

The strategy is to double the current capacity and to diversify the range of products made in China. By 2008, LG Chem’s plants in China will produce one million tons of PVC a year (currently 340,000 tons) and 700,000 tons of ABS (currently 300,000 tons). PVC and ABS represent around 60% of LG Chem’s sale. The drivers for this anticipated growth are strong sales of cars and consumer durable goods sector which will in turn induce an accelerated demand for plastics. LG Chem aims to multiply its annual revenue to reach USD 4.5 billion of sales and to achieve 7% of operating profit rate in China by 2008 in order to become out of the top 5 chemical companies in terms of scale and profitability.

Dow Chemical
Another indicator of the growth of China’s chemical industry is an announcement by Dow Chemical, the biggest US chemical producer. China would replace Germany as its most important overseas market after the US within four years. Dow expects this year’s China sales to increase by 25% to reach USD 2 billion.

IKEA Plans Further Expansion in China
IKEA’s two stores in Beijing and Shanghai continue to be successful: up to August 2004 sales in China are estimated at USD 121.2 million (Yuan 1 billion), an increase by 50% over 2003. Although this represents still a small portion of its total global sales of USD 13.6 billion (Euro 11.3 bn), the rise in disposable household income and the desire to show affluence promises further business potential. To meet this trend most products follow Scandinavian design trends, except for traditional Chinese utensils like chop sticks, woks and cleavers. However, in the home furnishing market, the competition has become more intense since local stores have improved design and quality – a challenge for IKEA.

IKEA announced plans for a further expansion in China by opening 10 new stores within the next 6 to 8 years in cities with a population of over 4 million people.

On a global scale, IKEA expects to source approximately 23% of its worldwide purchasing from China this year – an ideal combination of Scandinavian design and low manufacturing cost.

Unilever to Open a New Headquarter in Shanghai
Unilever, with business operations across China, is enlarging its China headquarter in Shanghai. They purchased a 20,000 sqm. office unit in a well-developed business park in Chang Ning district, near Hongqiao International Airport, where preferential tax rates are granted by the local government.

The market for semiconductors in China is expected to quadruple from USD 9.7 billion in 2003 to USD 36.3 billion in 2008. They are mostly used by China-based manufacturers of mobile phones, digital appliances etc. But as seen about three years ago, the industry is strongly affected by demand changes and chipmakers have to live with this. Currently, manufacturers have a mixed outlook for the near future with softening demand from overseas but stable domestic growth.  The six-inch wafer market segment accounts for about 75% of China’s total demand and the average selling price for eight-inch wafers rose from USD 180 to USD 190 in the first quarter of 2004.

Intel generated USD 3.7 billion in sales in China last year, or 12% of the company’s total. According to Fortune Magazine Intel’s China business is very profitable. The Asia Pacific Region is Intel’s biggest sales area with Taiwan generating USD 4.4 billion in sales in 2003.  It currently operates manufacturing facilities in Beijing, Shenzhen and Shanghai. It is also in the process of constructing a new USD 375 million facility in Chengdu, West China to be allocated to assembling, testing and packaging microprocessors.

In 2005 Intel Corp will move its assembly and packaging activities for technologically advanced products from Malaysia to a new plant being build in Hong Kong. The company intends to use the territory’s geographically closeness to the Guangdong province. Especially the computer sector is booming in southern China with the world’s top manufacturers like IBM Corp operating production facilities in Guangdong. Last year, approximately 26% or 39 million computers of the worldwide production output were manufactured in China.

Intel is also a strong venture capital player having invested more than USD 200 million in some 50 companies in China.

The Japanese group, Renesas, merger of the micro-controller operations of Hitachi and Mitsubishi Electric, one year ago invested USD 3.6 billion in its two plants in China. Renesas is the world’s third largest computer chip maker and is increasing its production capacity in China by having recently established a new subsidiary in Shanghai. Renesas is targeting a 5% market share.

Another Japanese company, Toshiba, a leading maker of flash memory chips, anticipates 40% of the worldwide semiconductor demand to be in Greater China (China, Hong Kong and Taiwan) by 2010.

China is developing their own chip industry and they certainly made progress in the past five years. Researchers at Tsinghua University and China Academy of Science are progressing fast in designing microprocessors and chips. Contract manufacturing has also grown substantially and SMIC has within 4 years grown its business from almost nothing to USD 1 billion. Surely China’s technology is still behind that of the dominant chipmakers, but the country’s talent base and the government’s backing may well produce a “China Intel” within 10 to 15 years.

FMC Became a Full Member of AGN

In 1st September 2004 Fiducia Management Consultants has joined as a full member of Accountants Global Network International (AGN) (www.agn.org).  AGN International, headquartered in London, is an association of independent accounting, audit and consulting firms. AGN member firms provide their international clients these dedicated services in 78 countries across the globe.

FMC Speaking Engagements in September and October

1. 'Purchasing in China' in Duesseldorf on 13th September (BME Akademie)
2. 'Controlling in China' in Munich on 15th September (Management Circle)
3. 'Quo Vadis, China' in Berlin on 16th September (McCannErickson)
4. 'Distribution in China' in Muenster on 16th September (OAV/ IHK)
5. 'Controlling in China' in Duesseldorf on 13th October (Management Circle)
6. 'Changing China' in Hamburg on 14th October (HSH Bank)

The recent Formula 1 Grand Prix was evidently won by Rubens Barrichello, but the real winner was Shanghai. Over 150,000 spectators were attended at the world’s most advanced race track and millions worldwide watched the race on TV – a major promotion event for today’s Shanghai! All in all, the event went very smoothly, yet again showing what Shanghai is capable of achieving.

Whilst few people can yet afford a car, the interest was definitely very strong. The brand name game was in full swing with car companies and sponsors like Siemens showing their products and selling merchandise. Ferrari shirts and hats were a favorite item costing however some USD 37 (Euro 30) each. A sales assistant says that on average each customer spent about USD 86 (Euro 70).

The circuit was designed by German architect Hermann Tielke and build in a record time of 18 months at a total cost of over USD 359 million (Euro 292m). The whole track is standing on some 40,000 concrete piles 40 to 80 meters deep. 350,000 cubic meters of polystyrene were used - China’s market supply for the entire year!
Hotels were fully booked (at record prices) and the list of entertainment and marketing events hosted by foreign companies was endless.

Some happenings during the Grand Prix weekend:

1. Ferrari announced the setting up of a Trading Joint Venture in Shanghai with China Poly Group and Hong Kong based Italian Motors, the latter two holding 30% each.  Ferrari’s showroom is just opposite of our office in Nanjing Road and during the Grand Prix Mercedes opened a big showroom here as well. Ferrari expects to sell 300 cars next year up from 100 Ferrari and 80 Maserati cars having been sold until now.
2. Louis Vuitton opened a 900 sqm. flagship store at Plaza 66 in Nanjing Road West. The grand-opening party was a major event with movie stars from China and Hong Kong and Chinese Olympic medal winners in attendance. With 13 stores in nine cities China is already their third-largest market after Japan and the USA.
3. Hugo Boss opened an office in Shanghai and expects to have eight shops by the end of this year. The company expects China to be among the top 10 markets in four years time. In addition to Boss Man, which accounts for 90% of sales in China, the Hugo brand will be introduced with the opening of a separate store in Shanghai at the end of this year.
   

Morgan Stanley has agreed to buy a 20% stake in Shanghai Yongle Home Appliance for USD 50 million becoming its third-biggest shareholder. The retail chain Yongle, which controls more than half the market in Shanghai plans to increase the number of stores from 100 in 2003 to 350 next year. Additionally, the company wants to expand into the Pearl River Delta region. Morgan Stanley will advise the company on a planned listing in the US and Hong Kong. The transaction mirrors a previous transaction whereby the investment bank acquired a stake in Hong Kong listed China Mengniu Dairy before helping the company to list overseas.

Carlyle Group, the world’s third largest buyout firm plans to increase its China investment from USD 150 million to more than USD 1 billion. On its shopping list are state-owned companies as well as private start-ups seeking capital. So far Carlyle focused on high-growth private companies in China such as Ctrip.com, a Shanghai based airline and hotel reservation company.
The government is expected to accelerate the sale of state companies in the banking, insurance, power and other industries providing opportunities to acquire assets. It is expected that the state industry may shrink to 10% of the economy from the current one-third within the next five years. There may be quality assets, but how to find them and how to value them remains a challenging task.

The other two major buyout firms with a reported interest to increase acquisitions are Warburg Pincus and H & Q, whilst at the same time Lone Star Funds plans to close its Beijing office because of a shortage of deals. According to reliable sources a consortium consisting of state-owned Minmetals, Baoshan Steel, Citic Investment, Jiangxi Copper and Taiyuan Steel an exclusive agreement is going to be signed to acquire Canadian miner Noranda. The deal is said to be worth between USD 4 and USD 5 billion. This is another example of China securing the supply of commodities needed for its growing industries.

Companies in Greater China are experiencing a growth in sales and revenue resulting in a skill shortage. With a high demand for talent, salaries are set to increase. A rise of 8% is expected on the mainland and in Hong Kong, where pay has not raised significantly in recent years an increase of 3% to 6% is predicted.

Experienced local talent is hard to find especially in the areas marketing, communications, advertising and public relations.
For foreign companies the challenge of recruiting and retaining staff continues to be a challenge – the skills shortage is made worse by a steady influx of new companies, business expansion and local companies poaching staff.

As a result of an increased focus on sourcing by multinational manufacturing companies we see a growing demand for qualified staff including foreigners with international experience.

Labour Cost Rising in Shanghai
Shanghai’s economic development is increasingly reflected in rising costs prompting foreign companies to review operations and in some cases to move manufacturing activities to other cities. From the first of July, the municipal government in Shanghai set the minimum salary for laborers at USD 0.97 (Yuan 8) per hour instead of USD 0.67 (Yuan 5.5), an increase of about 45 %. According to a survey by the Labor and Social Security Bureau among more than 4,000 companies, manager salaries in Shanghai rose by 19% last year. Salaries for engineers in Shanghai are about 2.8 higher than in Chongqing. A merchandiser working for a German buying office in Hangzhou earns 50% less than his counter part in Shanghai.

Chinese Companies Recruiting Overseas Talent
A growing trend is the recruitment of foreign talent by mainland companies. These are for example consumer goods companies with an increasing focus on international business. A group of state-owned enterprises and private companies in Chongqing are searching for foreigners and overseas Chinese for 150 senior positions to tap experience and international business contacts.

The Bank of China in Hong Kong is now “importing” talent by recruiting a deputy chief executive, head of corporate banking, chief risk officer and chief operating officer. The move aims to strengthen the management structure and to contribute to the bank’s development – certainly caused by losses in lending to mainland customers in 2003.

There are also unusual openings:
The SCMP in Hong Kong reports that Chinese companies are recruiting Caucasians to act as western executives for an hour or a day. This could be for the grand opening of a department store, an important sales pitch by a company or posting as a designer at a fashion show. The deception is known as anpai waiguoren de mian kong or arranging a foreign-looking face.

The “employer” wants the customer, sometimes even a western company in China, or local government to feel that their company is successful and that they have an international flair. For those needing such Baron Munchausen-style services the going rate is USD 615 (Euro 500) a day.