the age of great consumer! · performance check global players consumer wave by mirae asset...

❶ Performance Check ❷ Global Players ❸ Consumer Wave

by Mirae asset Financial GroupQ4 2013

EmErging markEt Consumers Drive Change!

The AGe of GreAT Consumer!

Special interviewDemographicS SpecialiStclint laurent

inDian autoFast Forward to the past

Brazilian inDuStry it's time to embrace competition

EmErging markEts insight 2

Duncan ParkLee Sang Wonkim kuk hWa marc SicheL

Yang Young heeLee hoo ShimJang min a

kim gYung rok

Lee Sang geon

Yoon chi Sun

oh eun mi, Lee Seung a

Peter graham

hYeon-Joo Park

Editor-in-ChiEfEditors

art

PrEsidEnt

ExECutivE dirECtor

rEsEarCh fEllow

rEsEarChErs

hEad of MarkEting division

PublishEr & ChairMan

Mirae asset retireMeNt iNstitUte

Mirae asset Global iNvestMeNts (Usa) llC

PUblished by Mirae asset FiNaNCial GroUP

The views and information discussed in this publication are as of the date of publication, are subject to change and may not reflect the current views of the writers or of Mirae Asset Global Investments (USA) LLC. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Mirae Asset Global Investments (USA) LLC does not accept any liability for losses either direct or consequential caused by the use of this information.

Q4 2013 contents

Emerging Markets Insight is a quarterly, on-line publication of Mirae Asset Financial Group. Our editorial mission is to provide timely and actionable information about economics, finance, and business opportunity to key stakeholders in emerging market investing, particularly financial professionals, strategists and academics.

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3 Chart & Graph

4 Special Interview

Clint Laurent10 Investment Focus

The Age of the Great Consumer

Emerging Market Consumers Drive Change!

① Performance Check

②Global Players

③Consumer Wave

15 Special Report

The Three Rising Stars in China Chinese enterprises that are worth

watching.

① BIO HUADA Tech

②IT Tiertime

③Mobile 91Wireless

25 Chinese Food

Organic Boom in China31 Indian Auto

Fast Forward to the Past36 Indonesian Travel

Travel Time41 Brazilian Industry

It’s Time to Embrace Competition

EMERGING MARKETS INSIGHT 3

CHROME STEPS UP AS THE “NEXT BIG THING”

CHINA, ANOTHER GIANT IN PATENT APPLICATIONS

Chart and Graph

LOOKING FOR

PATTERNSNumbers worth remembering.

You can fi nd more at “Chart of the day” in an iPhone app, EM Experts, that provides unique info-graphics

about emerging markets or follow us on Twitter (@emexperts).

Source : Mirae Asset ResearchCopyright©Mirae Asset

The iShares MSCI Emerging Markets ETF, a representative passive fund investing in emerging countries, has been experiencing continuous fund inflows. This indicates that there will be increased non-arbitrage net buying of Korean companies by foreign investors going forward.

Chrome, Google's web browser launched back in 2008, is now the largest browser in the world, responsible for about 43% of all web traffic. Chrome has already become the most commonly used web browser in many nations with the exception of China, Korea and several African countries.

Even though it has a reputation for its imitation markets, China is actually one of the world’s largest patent application holders along with the US and Japan. China ranked second in the number of patent applications in 2011, while the US topped the list by a large margin.

With the implementation of “Obamacare,” the number of Medicaid enrollments in the US has been increasing. Obamacare basically aims to expand the availability of Medicaid, while penalizing those who are able to afford health insurance but do not enroll. However, the big question remains: how will the government fund the program.

COMMERCIAL ENROLLMENT: ANOTHER SIGN OF THE US

RECOVERY

The increasing number of commercial enrollments is one of the many signals that reflect the US economic recovery. The figure once decreased sharply as the US economy went through the global financial crisis. However, with the economy picking up, the number of commercial enrollments has also started to post a rapid recovery.

EM ETFS GAIN FOREIGN INVESTMENT

OBAMACARE LEADS TO INCREASE IN MEDICAID


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Profile

Clint LaurentArmed with a master’s degree in business from Victoria University and a PhD. in marketing and statistics from Bath University, Clint Laurent moved to Hong Kong in 1976, where he eventually launched and sold two regional research companies before founding Asian Demographics in 1997. The firm developed historical databases of Asian countries that have been used in forecasting long-range changes in population, labor forces, households, income and spending patterns. In 2006 the firm became Global Demographics, reflecting its wider reach in consulting with clients around the world. In his book Tomorrow’s World, Laurent shows the power of demo-graphics in shaping the world now and into the future.

Clint Laurent uses today’s demographics to help predict economic patterns around the world over the next 20 years.

By the NumBers

Clint laurent

Special Interview


since moving to hong Kong in 1976, you have intensively studied and researched Asia. What was your motivation for moving to hK? Were there specific reasons for your interests in Asia?

At the time it seemed a fun and exciting place for my wife and I to be, with great upside opportunities. We were right.

you are widely known as the founder and managing director of Global Demographics. We all agree that demographics will be considerably useful and helpful to policy makers and corporate strategists.

however, why is having a better under-standing of what demography is telling us important to each of us personally? Why do we have to know “demographics”?

Demographics significantly determine many aspects of society. For example, the simple age profile of the population today has implications for the typical family life-style, the types of shops that exist, demand

for recreation facilities, education facilities etc. Clearly the profile of products and ser-vices sought by a country which is predomi-nantly young is going to be very different from that sought by a country which is pre-dominantly older–even if the household income levels are the same. To not under-stand the essential nature of a country or region’s demographics would significantly

inhibit the ability of an individual, company, or any organization to operate effectively in its environment.

In your book Tomorrow’s World, you mentioned the change of consumers’ tastes rather than a lower level of liquidity as a main reason behind the recent rela-tively sluggish consumption in developed markets (previously the main engine of global consumption growth). In your opin-ion, what kind of consumption patterns will appear in the existing developed market?

It would appear that during the relatively short period when the developed economies were in recession, with the consequent impact on employment and incomes, people learned (perhaps to their own surprise) that they really didn’t need to consume as much as they were. How many shirts does a man really need? To some extent it was probably even slightly self-satisfying to learn how much they could do without, or could

The simple age profile of the population has implications for the typical family lifestyle, the types of shops that exist,

demand for recreation facilities, education facilities etc.

Special Interview


achieve at a lower cost. This has been accompanied with a growing awareness of quality rather than quantity of “things” as well as lifestyle. While there will be a rever-sion back to consumption as incomes increase, I suspect that people now have a slightly different value system, and con-sumption will perhaps be a little more con-strained and careful in nature.

Given the prediction that 56% of total consumption growth across the world from 2012 to 2032 period will come from house-holds, it will be important to understand the consumption pattern of households with incomes exceeding $100,000. What is your take on this?

Yes, the high-income household (defined here as those with an income over US $100,000) is very important to consumption. Clearly they have much greater discretion-ary capability because food to some extent has a maximum. The household basically gets to a point where it really doesn’t need to spend any more money on that category. The same to a lesser extent applies to tele-communications, clothing, and even educa-tion. This means that as the incomes increase, more money, proportionate with the in crease in current income, is available for what might be defined as more discre-tionary categories. This includes experiences rather than things.

For example, travel, media consumption, and recreation generally. But because the affluent are typically older in age profile, the need to save and provide for retirement and health care demands is also significant. So, in total, we expect more discretionary areas

and savings to be the major growth areas of these sorts of households.

Also from your book, you mentioned “some rich countries in Asia” along with North America, Western europe as the very attractive markets where people are older but more affluent. specifically, which coun-tries can be included within the “some rich countries in Asia”? And what are the char-acteristics of those countries?

The rich countries in Asia are defined as Japan, South Korea, Australia, Taiwan, Singapore and Hong Kong. The last two are not particularly important because of their small population size. However they tend to be very good as leading indicators of con-sumption that emerges in other Asian coun-tries.

Can we consider abolishing the “one-child policy” as a practical solution to

Special Interview


China’s lower growth? (some analysts say declining fertility rates and the subsequent low labor-force growth in China are the main reasons behind China’s lower growth.) What were gains and losses of the one-child policy.

There is an important issue to be dealt with here. Seeking growth by increasing the population is not necessarily a good objec-tive. Basically it means you continue to have more poor people. There is an increased understanding of the advantages of the Japanese model which has fewer affluent people leading better lifestyles. It is true that China’s labor force is now shrinking in size but one should appreciate that at the same time, thanks to the one-child policy, every-one in that labor force under the age of 45 now has at least lower-secondary education, and as such has significantly higher produc-tivity than persons in a workforce with low

standards of education (such as India). So the net effect is that while China will have fewer workers and also a smaller population, they will nonetheless be individually more affluent and therefore leading much better lifestyles. Yes, total GDP will grow at a slower rate, but the point is it will keep growing, and with the rebalancing of the Chinese economy towards greater domestic consumption, household incomes will continue to grow at a faster rate than GDP.

It should also be noted that abolishing the one-child policy would not lead to an imme-diate increase in the size of the labor force. With improvement in education opportuni-ties in China, the babies born next year would not be expected to enter the labor force until at least 18 years’ time. So, not a quick solution. One should also appreciate that the one-child policy cannot simply be

relaxed. There are 345 million women of childbearing age in China today and if they all decided to have one extra child, the entire childcare industry in China, which is currently handling 13 million births a year, would be simply overwhelmed. So, at best a very con-strained relaxation of the one-child policy is likely to happen.

In terms of the advantages of the one-child policy, it is quite simple. It meant China was in a position to educate all the children who were born subsequently. This is actually very important. China has compulsory edu-cation for all children aged 6 to 12 years, and now in many cases it is available to age 15, which includes some upper secondary edu-

cation. This means that its population can read and write, and it has

much more “able” employ-ees and therefore much

more productive; it leads to higher sala-ries and better life-styles. Compare this scenario with India

where 2 out of 10 chil-dren receive no educa-

tion at all, and those that do receive their education in

class sizes typically of 90 students. The Indian labor force has no prospect of being as productive as that of China in the immediate term, and with that, household incomes and lifestyle will not improve for the majority of that society in the same way that China has achieved.

you said in the book that the size of China’s market for children’s products is expected to shrink. In fact, you mentioned we may find more attractive consumption opportunities in markets for those over age 45 in China. What are your reasons for this? And specifically what (sub) sector do you expect to see considerable expansion?

The existing age profile of China’s popula-tion significantly determines how it will change over the next 20 years and which age groups will grow or decline in size. The

Seeking growth by increasing the population is not necessarily a good

objective.

Special Interview


existing age profile shows quite clearly that the number of women of childbearing age is now declining, which when combined with the lowering propensity of those women to have children means that the number of births will not increase and in all probability will decline from 13 million now to around 8 million by 2032. This represents a 32% decline in the number of young people, and it doesn’t really matter what the product is; if it depends on under 24-year-olds for its con-sumption, then it is going to have a more dif-ficult marketing task as there will simply be fewer target consumers. In contrast, the fastest-growing age group in China is per-sons over the age of 65, and that will basical-ly double over the next 20 years. Now, unfortunately, the older person in China has had a fairly poor earnings history, low aggre-gate savings and has relatively few fixed assets and as such does not really represent a great marketing opportunity.

The real opportunity in China is what we call the working age empty nest group, aged 45 to 64, whose child has grown up and left home, and has 1.6 wage earners in it. This household group is not growing in number

but the key point is that it has high discre-tionary expenditures and their incomes are still going up. This group will drive the con-sumer market in China over the next two decades. All age groups younger than this will decline in size and hence are not going to be nearly as attractive.

With household disposable income in China rapidly increasing, what kinds of trends or characteristics will we see from China in the future?

The essential shift in consumption that will take place over the next two decades in

China will be from acquisition to experience. Over the last two decades, with growing household incomes, the average household has moved from being fairly basically equipped in terms of durable items to now being a fully equipped household. (That is, it now owns a washing machine, television, stereo system, refrigerator, etc.). Also, over the last two decades the bias of households was to that of the family household, that is, two adults and one child.

In the next two decades, incomes will con-tinue to increase, the household will transi-tion from being a family household to an empty nest household, and with that the per capita disposable income increases signifi-cantly. The bias of expenditures will move away from providing for the household to providing for the lifestyle of the people in that household. This means better quality food, better health care, more travel- and experience-related expenditures, etc. This shift is actually very significant in nature and means a number of new market opportuni-ties will emerge in China over the next two decades representing opportunities for many innovative companies.

The real opportunity in China

is what we call the working age empty nest group,

aged 45 to 64.

Special Interview


In your book, you said 49% of India’s working-age population entered the labor force sometime after 2012. In that case, how will the quality be of those newly entered and young into the labor force? If they are just “cheap and unskilled work-ers,” they might end up temporarily helping only certain parts of the manufacturing industry.

The problem in India is not the number of people, but rather the education of those people. At the moment, India has 25 million births a year, and while the propensity to have a child is going down, the number of women of childbearing age is going up. The net result, given existing propensities to seek employment, means that India needs to find 14 million extra jobs every year for the next 20 years. But because these 14 million peo-ple have not been well educated (two out of every 10 receive no education, and a very low proportion extends to upper secondary), the ability for India to raise the quality of this employment is severely constrained. It can find the senior managers from the relatively small (8%) share of its workforce with tertia-ry or university education, and it can find plenty of people to do really basic jobs from the very high proportion who have primary or less education. However, it cannot move its manufacturing up to a higher productivity

level because it lacks sufficient people with secondary or vocational education.

Now there is an opportunity for India to correct the situation if it acts quickly. If it sim-ply pushes money into the education system now, then over a relatively short period (the next two decades) it can significantly improve the education profile of its workforce.

What do you think is the reason for the low labor participation of women in India?

The reason for the low female participation in the labor force is a combination of lack of education, as availability of education differs significantly between males and females, and also social attitudes. Sadly, something such as this does not change rapidly.

In the same context, “getting education right” can be cited as the most urgent task that India faces. Otherwise, India's eco-nomic and political future can be at risk due to a large group of poorly skilled work-ers who need a job. how can enhancement in education improve India’s productivity?

Basically, India lacks what you would call the middle-level employee. It has sufficient people to be senior managers, and obviously a surplus of people to do really basic tasks. However, the real productivity of an econo-my depends on the ability to have enough

people to do the more complex tasks required in modern manufacturing. The threat to India if it doesn’t do this is that robotics (located elsewhere in the world) will replace the work done by those doing the really basic tasks in India which in turn leads to unemployment in India.

In your book, you briefly mentioned emerging markets such as Indonesia and thailand in a positive light. Are there any other emerging markets you are paying attention to?

We are looking at two sets of markets that are potentially benefiting from the rise in the cost of labor in China. The first of those is countries in Asia which have a reasonably well-educated labor force which is also grow-ing in size, and that obviously includes Indonesia, Vietnam and the Philippines. Thailand is also an attractive proposition in that it has a very well-educated labor force and a good infrastructure, but people do not seem to realize that in its case the labor force has peaked and is declining in size. So extra investment in Thailand would have to compete for labor which would push up wages rapidly there, whereas in Indonesia, the Philippines and Vietnam the supply of labor is still increasing and wages would not be under threat (although they would increase).

Clearly the extra investment attracted to these countries will benefit the economy’s overall and lead to steadily improving stan-dards of living. Countries such as Laos and Cambodia do not offer an appropriately edu-cated labor force or infrastructure to be any-thing more than an interesting opportunity at this stage.

The other area to look at is Eastern Europe, which has a very well-educated labor force, very good infrastructure and is logistically very close to the very significant Western European market. Increasingly, the cost of logistics offsets labor costs, and to that end Eastern Europe is an increasingly attractive environment for manufacturing, and with that those economies can expect to grow in affluence and size.

Special Interview


Great ConsumerPerformance Check

The Age of ThegreAT ConsumerBy Oh Eun Mi

Photos by SHUTTERSTOCK

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2010/09 2012/012011/05 2012/092011/01 2012/052011/09 2013/01 2013/05 2013/09

AB InBev

14.4%Estimated annual growth rate of EPS from 2013 to 2016

sTArBuCksone billionThe number of capsule coffee, K-cups, sold until Q3, 2013

STARBUCKS

AB INBEV

BMW

AMAZON

GOOGLE

L’ORÉALMSCI EM INDEX (USD)

Industries and promising companies that have benefited from the growth of domestic demand in emerging nations for the last year were scrutinized by Great Consumer. These are companies that started with the so-called luxury market but are growing in emerging markets such as automobiles, IT, cosmetics and the beverage market by targeting the middle class. Major companies with competi-tiveness from the “where they generate profit” perspective rather than from the “where they are located” perspective were also highlighted. Although Starbucks, L’Oreal, BMW, Google and Amazon are companies based in developed countries, they generate profit in the emerging markets and are still working hard to win more consumers in these markets. Great Consumer

takes a look at the recent performance of these consumer goods companies.

In the era of consumption revolution, how did the “the beneficiaries of growth in the emerging market" perform?

AmAZon

70,000Additional part-time employees in holiday season

googLe

$3.3 billion Google glasses' estimated value in 2017

BmW

1.2 million The accumulated number of BMWs and MINIs sold in China (2008-2013.8)

L’orÉAL250 million Targeted number of new Chinese customers

msCI emergIng mArkeTs Index23 The number of emerging countries included in the MSCI index

Stock prices in Sep 2010 = 100

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Throughout last year, Global Great Consumer introduced rapidly growing companies in a number of emerging countries. But there are some other companies that are worth mentioning. There are 30 categories in the Global Great Consumer. The categories introduced so far showed rise in stock price. However, even among those cate-gories that were not introduced some are worth mentioning. (Operating Profit on Sales: based on the fiscal year of 2013, rounded off to the nearest 100 million yen or 100 million dollars. The growing rate of stock price is based from Oct. 1, 2012 to the end of September 2013)

Great ConsumerGlobal Players

Net revenue : $11.7 billion

Operating profit : $2.3 billion

Net profit : $1.5 billion

Stock price growth : 46%

Las Vegas Sands is a casino and hotel franchise that has made its way into several countries such as China, South Korea, Vietnam, and Japan. Las Vegas Sands is growing rapidly in emerging countries espe-cially in Macau. According to Las Vegas Sands, the EBITDA for 2012


Operating income : $21 billion

Net profit : $21 billion

Stock price growth : 42.1%

Visa is the number-one company in the credit-card business. Its particular strength is demonstrat-ed in its electronic payment sys-tem. Visa launched the “visa pay-Wave,” a contactless mobile pay-ment program. Although it was launched two years after its com-petitor MasterCard launched “PayPass,” it penetrated into the electronic payment market with the advantage of securing fran-chises in about 150 countries. In

1 Las Vegas Sands

2 Visa3 Unilever

was 32.7% and 34.1% in the first half of this year. EBITDA is an indi-cator that shows the ability of a company to generate cash from business activities, so it essentially represents the actual value of the company.

2010, it took over CyberSource, an online payment system to hold its place as an electronic payment service provider. These days, Visa is devoting all of its energy in tar-geting the emerging markets. Visa is planning to provide payment services through the identification program that is implemented by the Indian government. In 2011, Visa took over Fundamo, a mobilewallet company in South Africa.

By Lee Sang Won, Photos by SHUTTERSTOCK

SeVen CompanieS Worthy of CarefUL obSerVation

Net revenue : ￡51.3 billion

Operating profit : ￡7 billion

Net profit : ￡4.9 billion


Unilever, with over 400 product brands such as Dove, Vaseline and Lipton, has had significant success in emerging countries like India. Founded during the period when European countries engaged in colonial management in African and Asian countries, the company understands the characteristics of emerging nations better than their competitors. Therefore, when it enters into the markets of these emerging countries, it manufac-tures products that fit in well with

the characteristics of each corre-sponding country, advertise accordingly, and marks its pres-ence there. No wonder it is consid-ered a successful example when it comes to penetrating the markets of these countries. Such strength is the main factor behind the con-sistent increase in revenue, oper-ating profit, and net profit even amidst the economic crisis.


Great Consumer

Net revenue : ￥5.2 trillion

Operating income : ￥1,320 billion

Net profit : ￥962 billion


There were reports after 2008 that it was the end for Toyota Motors. Low revenues as a result of the global financial crisis, massive recall issues and the performance of Hyundai and Kia Motors appeared to provide less hope for the future of Toyota in the industry that it once dominated. Net sales in fiscal year 2008 (from April 2007 to March 2008) were $29.2 bil-lion but fell to $23 billion in the fiscal year of 2011 (from April 2010 to March 2011). But this was not the end of Toyota. The company had latent energy. Since last year, it is back on track, showing an uptrend. From April to July 2013, Toyota recorded $6.6 billion in revenues, which is close to the $6.9 billion recorded in 2008.

According to Bloomberg, Toyota remained number one in world sales late as of June 2013. It was revealed that Toyota sold 4.9 million cars this year, 1.2% higher than in the same period last year, selling 60,000 more cars than the second-placed GM. A major reason behind the recovery can be attributed to the increase in sales from cost savings and sales efforts. Furthermore, the weakening of the yen this year may possibly translate to higher sales. Toyota targeted the sale of 10 million cars this year using the weakening yen as a weapon. Toyota’s director of PR, Konishi Koki, stated during a newspaper interview that “the operating profit for the fis-cal year of 2012 (from April 2012 to March 2013) reached $131.3 billion, while the period during which the yen currency was weak was January to March of 2013, therefore, the difference in currency rate did not make much of a difference,” and he added, “We expect to be able to feel the impact of the weak yen in the fiscal year of 2013 (from April 2013 to March 2014).”


Operating profit : $3.9 billion



MasterCard focuses on innovation following chronological change. In order to stir a revolution of new methods in e-commerce for the first time, MasterCard is insisting on the “financial inclusion.” To this end, it expanded its e-commerce business by taking over DataCash, and in 2011, it took over Travelex, a currency exchange company, as it announced plans to focus on prepaid cards for travelers. In 2012, it announced plans to expand into the Middle East mar-ket with the Tap & Go PayPass. More recently, MasterCard and EFL announced a global partnership to promote the growth of small enterprises in developing coun-tries. According to MasterCard, this partnership will provide a new tool for international issuers that will improve the reviewing process for small enterprises in the devel-oping countries without a bank account to borrow money.

Net revenue : $525 billion

Operating profit : $11 billion



Nike continues to excel. While per-forming well in the US market, it is also expanding in the overseas market. Nike recorded $780 mil-lion of net profit during the first quarter (June to August) of this fiscal year, which is a 38% rise compared to the same period of the previous year. As a result of improved performance, especially in the US market that covers half of its revenue, Nike recorded $3.1 billion in revenue, which is 9% higher than the previous year. Nike’s growing brand is expected to make a significant impact in emerging markets. In particular, from 2010, the revenue in China was so vast that Nike separately classified China in its accounts. While revenue in China was $1.28 billion in 2009, it jumped to $2.45 billion last year, almost twice as much. In other emerging markets, the revenue increased from $2.2 billion of revenue increased to $3.7 billion over the same period.


Operating profit : $8 billion



The popularity of Korean culture contents such as “Pororo,” “Psy,” “Girls’ Generation,” and the movie “Snowpiercer” is spreading across the globe. As much as its popularity, there are expectations of growth in culture con-tents. Yet, when compared to Walt Disney, the powerhouse when it comes to culture contents, it’s just a drop in the bucket. According to ana-lytical reports on the trends of contents business that the Korea Creative Content Agency released last year, the revenue of listed content compa-nies in Korea amount to 21 trillion KRW.

However, the revenue of Walt Disney alone last year was $42.3 billion, twice the revenue in Korea. It’s easy to relate Walt Disney to only movies like “The Mermaid,” “Beauty and the Beast,” “Pirates of the Caribbean,” and “The Avengers.” But surprisingly, Walt Disney’s prime business is its broadcasting business which includes the sports channel ESPN and ABC. The broadcasting business alone generated $19.4 billion last year, which amounted to 45% of its entire revenue. Moreover, it is adding to its profit by selling consumer goods such as character figures. Disney recorded a net profit of $1.85 billion in the third quarter of this year–a 1% increase from the previous quarter.

Growth rate compared to the previous year

All of the companies are displaying a growing trend compared to the first half of 2012. In particular, Toyota Motors recorded a

staggering 97% operating profit. (The performance in the first half of 2013 was compared to the first half of 2012 for each

company. However, where the fiscal year was different, each quarter was added up.)

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The Consumer markeT in emerging naTions is The “gold mine” of Tomorrow

By Oh Eun Mi

Photos by SHUTTERSTOCK

Great ConsumerConsumer Wave

We have not yet addressed the consumer market, as we have focused thus far on introducing specific sectors and events. So, let’s look at the three major trends that will turn the consumer market of the emerging nations into a gold mine.

Peter Drucker, the guru of modern busi-ness studies, once stated that “innovation is not something that causes change but some-thing that exploits change.” If we replace “innovation” with “investment,” we can state that “a successful investment does not cause change but exploits change.” An economy evolves with a series of economic booms and depressions. There is no such thing as an economy with eternal growth or endless downturns. An economy and a society prog-ress as they go through the cycle of ups and downs similar to the many curves in life. But

the power that drives such aspects forward is long-term trends, the wave of change.

As developed countries suffer from low consumer demand and as we see the invest-ment funds of emerging nations being with-drawn as a result of the recent economic cri-sis, it’s no secret that emerging nations that have sped like a runaway train up until now are starting to falter. Nevertheless, the con-sumption of emerging nations has estab-lished itself as a clear current that is leading the world economy. And looking more close-ly, one can see that the underlying strength that is driving the growth of the consumer market in countries like China and Brazil is the growth of the middle class.

Targeting the middle ClassAs the middle class in Korea formed in the

1980s, the country went through a boost in demand for domestic appliances such as color TVs and refrigerators, as well as hous-ing. Such change has now gone beyond the borders of one country and is occurring at a global level. Based on purchasing power, the middle class is usually classified as a group in the $6,000-$30,000 annual income range. An explosive increase in the middle-class population occurs in countries where there’s a simultaneous growth in population and economy.

In 1990, a mere 1% of the Chinese popu-lation comprised the middle class, but this figure is expected to increase up to a stag-gering 70% by 2020. India, the world’s sec-ond most populous country, Indonesia, and even African countries are ready to join in the ranks of the growing middle-class popu-


Great Consumer

lation. By 2030, the total middle-class popu-lation of the world is expected to reach around two billion, which is 40 times the population of South Korea today. Soon, the world will witness the “great birth of the mid-dle class.” The growth of the consumer mar-ket in emerging nations will significantly impact the world economy with the flow of wealth and trends that will continue for a long period of time, given the population structure. In other words, the growth of the middle-class population will continuously and directly impact the consumer market. As the growth of the middle-class population in one country results in a rise in consumption, when there are more developed countries with a high proportion of the middle class, the consumer market of the entire world will benefit. This is the reason why the global consumer market that has fallen into eco-nomic depression considers middle-class consumers of emerging nations as the “relief pitcher.”

new Consumption PatternsIf an expansion of the consumer market

as a result of middle-class growth in emerg-ing markets is considered as the main cur-rent of a long river, there is a flow of current that intertwines with the main current which accelerates the entire current. Certain facets must be examined meticulously in order to estimate the future flow of the consumer market.

The first is the aging population. As well as developed countries, aging populations are growing rapidly in emerging countries. In China, for example, the population of ages 0-2 dropped by 43% from 1990 to 2011, while the population of ages over 60 increased by 120%. Moreover, while 12% of China’s population in 2009 were people over 60, this figure is anticipated to rise to 31% by 2050. From this comes a saying in China, “Wei Pusen Rao,” which translates to, “One becomes old before he becomes rich.”

Though it may seem obvious, the increase in the aging population affects the consumer market. It goes without saying that a com-munity with many senior citizens has a com-

pletely different consumption pattern and scale compared to one with many young people. Such a difference will be glaringly apparent in a community where older people have the purchasing power. Not only do the elderly have consistent pension income, but also we should not overlook the fact that their spending power likely has increased vastly from long periods of employment. Moreover, as seniors today are more dynam-ic and active, a change in the current formula “senior=medical market” is likely to occur. Seniors today spend money on appearance, cultural life, self-development on top of spending on their health.

Even in Korea, we can see strategies and business methods that are tailored to cap-ture this consumer group such as the emer-gence of online shopping malls exclusively for senior citizens and the sale of diapers for adults and products for hearing loss during the prime time of home shopping. The spending power of seniors will broaden into two dimensions rather than one (health-driven) dimension as the numbers of elderly increase, which adds to the qualitative side, namely, income.

Second, is the nuclear family in the emerging market. The proportion of large families has diminished with urbanization and as people decide to have fewer children; the number of heads per household is also declining. Not only that, as the economy develops and there are more women in the workplace, the number of people who marry later in life or who decide to be single has increased, thus bringing about more single (one-person) households. And as the age of marriage is delayed and the birth rate declines, the standard of consumption is shifting from family-centered to individual-centered. In China, the little emperor born after the 80s has already established itself as

the major consumer group and the DINK (Double Income No Kids) group in the United States is adopting a convenient couple-ori-ented consumption lifestyle. Typically, an increase in nuclear families translates to growth in businesses such as convenience stores, fast-food restaurants, cars, and cell phones, etc. that are contrary to traditional consumption.

The last is urbanization, which essentially means simply that there are more people liv-ing in cities. By supplying cheap labor to growing industries, people’s income naturally increases, and they become more enthusi-astic in their spending. Moreover, the mere fact that urbanization causes consumption necessary in building infrastructure puts great energy into the consumer market. Li Keqiang, the deputy prime minister of China recently revealed that “urbanization is the powerful engine that will drive the future of China” and stated that he sees urbanization in China rising to 60% by 2020. According to a study, whenever there is a 1% increase in urbanization, the consumption in China has such an effect as to increase approximately by $208 billion per year in the construction, materials, automobiles, electronic products, medical, and cosmetics industries.

Urbanization is also developing quickly in Eastern Europe and South America, as well as in most of Russia. This trend is expected to spread soon to India, Indonesia and Africa. At present, the population living in cit-ies amounts to about 3.5 billion, which is expected to grow to 4.9 billion around 2030. In terms of scale and speed, we are certainly experiencing unprecedented urbanization.

Three aspects, namely, the aging popula-tion, changing nuclear family, and urbaniza-tion combined will turn emerging nations into a new gold mine never seen before. What is clear is the fact that the growth of the con-sumer market is an irreversible current, and future winners can only be companies that critically analyze and take advantage of such trends. In other words, finding companies that possess fitting strategies and opportuni-ties will become the winning investment in this consumption age.

The growth of the middle-class population will

continuously and directly impact the consumer market.


In China, millions of companies come and go within a day. Among those that eventually emerge, three companies worth particular atten-tion were selected. But note that these are not companies that just appeared out of nowhere. They are distinguished companies built on

many years of creative technology and unique management style in the fields of bio, mobile Internet and 3D printing. More importantly, the fields that these companies are in tie in well with the three consumption points: namely, China’s aging popu-lation, rising purchasing power and the increase in smart phone users. The three companies that follow are receiving the spotlight from Chinese consumers and have caught the eyes of Chinese investors.

❶ BIO HUADA Technology❷ IT Tiertime❸ Mobile 91Wireless

Special Report

The Three rising sTars in china


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Should a business, with assets worth some $160 million and an annual output of $320,000, spend $160 million to purchase a business listed in the United States suffer-ing an annual loss of some $480,000?

By the end of 2012, when news of this potential acquisition caused an uproar in the United States, 26-year-old Li Yingrui, a key official for the buyer, Shenzhen Huada Group, was against the move. Huada’s pre-decessor is the world’s largest genome

sequencing institution–Beijing Genomics Institute. This private research institution was young enough to set up a series of companies in 2012. The acquisition target was Complete Genomics (CG), a U.S. NASDAQ-listed company whose major business is the production of gene sequenc-ing instruments. Li Yingrui, formerly a core scientist, became CEO of Huada Scientific and Technology Co. (a.k.a BGI Tech) of the Huada Group in September 2012.

Li Yingrui opposed the purchase for two reasons: First, CG was operating in the red and Huada would have to support it with its own profit which was not there yet. Second, after the acquisition, Huada, which was a major client of Illumina, an American gene sequencing instrument manufacturer, would face cut-throat competition from Illumina. And the fact is that Illumina was already saying in public that the acquisition meant the Chinese were purchasing the

HUADA TecHnology geTs new wings

A Controversial Acquisition Puts Company at the Forefront of Genomic Sequencing. By Huangqiu, Photos by Wei Tianyi

1BIO ❶ Huada


“recipe for Coca-Cola.” The U.S. media was also hostile, with some outlets reporting that this acquisition would pose “a threat to U.S. security.”

Within Huada management, there were also those who stood in opposition to the acquisition. “Unable, shouldn’t,” said Huang Shengquan, Vice President of Huada, who moved from Vanke to Huada. In his view, Huada was not in a position to, and should not, make the purchase.

A Risk for china's sakeWang Jian, founder and spiritual leader of

Huada, thought differently way. He fully supported the acquisition. And the fact is that the acquisition took place, in his words, “in only five minutes.”

In June 2012, Huada CEO Wang Jun received an email from the CG trading adviser, informing him that the acquisition and subsequent operations called for at least $160 million. Although Huada did not have that much money at hand, Wang Jian and Wang Jun decided to make the pur-chase as they drove to the agricultural base of Huada in Shenzhen.

Wang Jian made the decision simply because China did not have its own sequencing technology. Without top-notch genetic sequencing instruments, China would not be able to produce such a machine. In 2010, Huada purchased more than 100 Illumina sequencing machines with CBD loans amounting to several hun-dred million dollars. This made it possible for its sequencing data to make up more than half of the total global output capacity in 2012.

“Huada is now in a position to do work from collecting genetic resource samples to making data analysis,” Li Yingrui said. “However, we are not able to do work in between the two. Given this situation, what could we do if Illumina refused to offer sup-plies to us?” Li Yingrui said the failure to solve this problem is not vital for Huada, but the problem has to be settled for the sake of China. Genetic information is like strate-

gic resources, which China must have. “Huada [has made] the purchase for the sake of China,” he said, adding that Huada has done this because Wang Jian has the country in mind. “Otherwise, Huada would not have to do this,” he said.

After repeated discussions, Li Yingrui and others who opposed the purchase agreed that CEO Wang Jun made the right choice.

“Huada has to take risks when it does so,” Li Yingrui said. It affects Huada profoundly. After the acquisition of CG, Huada reduced its gene sequencing costs. The price of a single sequencing instrument is as high as $160,000, but what is more important is that it can help open up the industry chain. “With the industrial chain, Huada can devel-op by leaps and bounds in future,” said Ling Yingrui.

The gene sequencing service oriented

toward research institutes, pharmaceutical companies and breeding companies is the most important cash source of Huada Technology. Half of its more than $160 mil-lion annual income comes from customers abroad. Since its registration with the Shenzhen Civil Affairs Bureau in 2007, Huada Technology maintains its operations by providing gene sequencing services and information analysis technology. Among these, there are orders for a total of $1,600 or $3,200 as well as cooperation agree-ments totaling more than $1.6 million or even $16 million.

In 2011, founder and chairman Wang Jian considered founding a new company due to Huada’s increasingly larger scale and more commercialized projects which demanded a clearer financial and operation-al mechanism. In 2012, a series of subsid-iary companies were set up. Of these, Huada Technology Service Co. Ltd., whose CEO is Li Yingrui, specializes in gene sequencing and information analysis, areas in which Huada Technology built up its for-tune. “Gene sequencing is only a section of its business currently, and might be the smallest section,” said Li Yingrui, who also said that with the gene sequencing technol-ogy, “Our organizational form, profit point and main business may change because of this problem.”

On March 18, 2013, the acquisition deal was clinched. Although many unknowns existed, the event offered Huada greater room to manoeuver. This benefits people in visiting their doctors or being diagnosed according to their own unique genetic makeup. If there were no barriers created by government regulations, this means there will be a revolution in medical practice while Huada will gain enormous marketing opportunities. “With sequencing results that can be immediately converted, one cannot tell in the end whether this is science or clin-ical treatment,” said Li Yingrui.

For Huada, risk came along with the injection of venture capital. Huada did not have enough money to do the deal and

The acquisition target was Complete Genomics …

whose major business is the production of gene sequencing

instruments.

BIO ❶ Huada

華大科技

Profit 2012

$103 million-

Profit growth rate forecast in the coming three years

30%

No.

1


cer samples will it be possible for us to sum-marize the patterns and finally explore the relevant medical applications. At this time, science and business are harmoniously linked together, driven by these ambitious scientists.

Both in the circles of science and busi-ness, Huada Technology is an exception that goes beyond expectations. In 2007, a few core scientists at Huada Technology left the system in the Chinese Academy of Science, moved south to Shenzhen, and

founded Shenzhen Huada Gene Institute. Huada Technology has been a controversial organization since its founding. Many critics argue that it is merely a “sequencing plant” that is at a low scientific level, depending on sequencing equipment and a massive staff “like a Foxconn in the circle of biology.” By 2012, however, scientists at Huada Technology had published more than 50 papers in authoritative scientific journals, such as Science and Nature. As quoted by Wang Jian, “We are embarrassed because we have published too many papers.” The fruits of its scientific research are being turned into tangible commercial potentials.

In 2005, then 19-year-old Li Yingrui joined Huada while he was still a junior at

therefore had to borrow. At first, Huada asked would-be investors to purchase CG and then have Huada be the custodian. This way, Huada would not have to take any risks, but the investors were not naïve. Wang Jian is a scientist involved in the “Human Genome Project.” At age 50, he is tall and imposing and has always been a bit of a rebel. He had the view that operating a company is the kind of work for people with less than great intelligence. He also had a strong aversion to capital funding. This time, however, he had no choice but to be involved in bargaining with investors to achieve his dream of “becoming the num-ber 1 in technology– not in business.

In December 2012, after being set up for less than a year; Huada Technology took out 42% of its shares for a financial injec-tion amounting to $223.68 million. China Everbright Holdings invested $64 million; Yunfeng Fund $36.8 million; Sequoia Capital, $32 million; and Shenzhen Venture, $3.2 million. But investors were most inter-ested in the group’s other subsidiary, Huada Health, which mainly specializes in prenatal genetic diagnosis technology, cervical can-cer screening and other medical services. Only a few cities were chosen as its pilot cit-ies in 2011, but its business income rose from $3.2 million in 2011 to $22.4 million in 2012. Wang Jian thinks it has multifold growth potential in the future. During nego-tiations, although being treated roughly by Wang Jian, these would-be investors still proclaimed that they hoped to retain the right to be the first considered in investing in Huada Health in the future.

science and Business Together In the eyes of the leaders at Huada

Technology, bioinformatics is still in its infancy. In order to have a theoretical breakthrough, it is a must to have a good command of genetic resources, which drove Huada to purchase CG. Li Yingrui offered the following example: Only when in-depth data collection and genome analy-sis have been conducted with a million can-

Peking University. At the age of 20, he pub-lished academic papers in the journals Nature and Science. In 2011, he was a sci-entist at Shenzhen Huada Gene Institute in charge of scientific research. In September 2012, he became CEO of Huada Tech-nology. Now there are plans to have the company listed in the stock market. Li Yingrui has outstanding communication skills and an understanding of business beyond most people’s impression of scien-tists. He said that big science and big indus-try share something in common, because both can turn their reliance on individuals into a reliance on certain organizational models.

After he became the CEO of Huada Technology, the most important task for Li Yingrui was to reorganize the company structurally. In 2012, Huada divided its work into several branches. Most of the gene sequencing projects were transferred to Huada Technology while some very aca-demic projects went to Huada Research Institute. “The reorganization will make the academic-oriented framework clearer, while profit-oriented business comes more profitable,” Li Yingrui said.

Though the staff and the jobs haven’t changed, Huada Technology, born as a research institute, is looking more commer-cialized. “When I was in the institute, I par-ticipated in the negotiations related to cooperation. At that time, I could fiercely argue with the other party without consid-ering their feelings when there was a dis-agreement,” Ling Yingrui said. Since the service company was founded, he said he must always consider and strive to be on good terms with customers and partners. These were not key points in the past. He believes that pursuing science means one should always pursue new things and “make a difference,” which are different from commercial goals. “It may be the big-gest challenge that Huada Technology is facing.”

Future science and business calls for an increased role from the capital market.

BIO ❶ Huada

Huada Technology has been a controversial organization since its founding. Many critics argue

that it is merely a “sequencing plant” that is at a

low scientific level.


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IT ❷ Tiertime

TierTime: A CompAny ThAT is prinTing The fuTureThe conversion from 3D printing in industrial production to consumer-level printing that is accepted by the general public indicates that Tiertime is carefully following the rhythm of change. By Zhou Hengxing, Photos by Shi Xiaobing

Sitting in front of an assortment of print-ed 3D models, Guo Ge, the General Manager of Tiertime, takes out his iPhone, points at its delicate plastic protection case and says, “This is printed by our 3D printer as well.” Looking at the vivid models in front

of us, it was hard to remember that this company was a “clodhopper” that manufac-tured quick-forming models oriented at enterprises three years ago.

Tiertime is the leading company in 3D printing equipment in China. In 2003, Guo

Ge, who graduated from Tsinghua University with a Ph.D., founded Tiertime together with some university classmates under the guid-ance of his tutor, Professor Yan Yongnian. He has been the General Manager since the foundation of the company. Ten years ago,


prospects for the 3D printing industry were totally different from what they are today. At first, 3D printing was called “additive manu-facturing,” which was mainly used in indus-tries like model manufacturing and industrial design; most of the customers were manu-facturing enterprises. In 1995, based on the ink-jet printer model, the Massachusetts Institute of Technology put forward the con-cept of “three-dimensional printing,” creating a new printer by pressing solvent onto the powder bed instead of pressing the ink onto the paper. Since then, more and more engi-neers have started exploring how to apply 3D printing technology to the household area.

Guo Ge said that, despite being a tech-nique with a long history, 3D printing was not recognized by the market for a long time. Throughout this period, however, Tiertime devoted itself to research and improvements in the technology of industri-al-level 3D printing but without much out-side attention, as was the case with its counterparts. Because Tiertime “suffered a cold welcome” in the marketplace for such a long time, the management strategy of the company in the past was simply to keep itself stable. Guo Ge said that back then, explosive growth in the market never emerged, with annual growth of perhaps 20% to 30%. Over the past several years, the goal of Tiertime was to survive and lower its costs.

As Guo Ge described it, “Back then, the capacity of the market was quite limited. Maybe a vegetable market in Beijing would be bigger than the whole 3D printing mar-ket.” However, because of this, some IT tycoons didn’t even glance at 3D printing, so that Tiertime could grow slowly in a rela-tively relaxed environment.

The future is “up”The revolutionary change came in 2010.

From then on, 3D printing technology is becoming more and more popular in the area of households.

Around 2010, Marketbot and 3D Systems

in America lunched their own desktop 3D printing products. The concept of 3D print-ing started to be a hit; the British publica-tion The Economist noted it would “pro-mote and realize the third industrial revolu-tion together with other digitalized produc-tion modes.” 3D printing started to become a new and strange word mentioned and recognized by ordinary people. In the same year, after several years of research and development, Tiertime developed its desk-top 3D printer “UP!” successfully. The princi-ple behind this printer is almost the same as that of industry-level 3D printers. The thick-ness of its molding layer is 0.15 to 0.4 mm and the volume of its printing object is with-

in 140 cubic mm. Taking advantages of numerical and material technologies, this 3D printer may heat, melt, and squeeze out materials like plastic threads, forming a three-dimensional entity model based on the layers accumulated. Besides, its printing process is quiet with a fast forming process. At the time, this was a quite early desktop printer suitable for the office or home.

But Guo Ge and his group were trapped in a dilemma. That is, should they continue to launch their main products, namely the industrial-level 3D printers as supplement-ed by UP! or give up the advantages they had already achieved to focus on firmly backing their desktop 3D printer?

If they chose the former route, it meant the core business of their company could go on developing steadily, while the latter meant the business structure of the compa-ny would need to change completely. There is no doubt that someone would question such a drastic change. “Generally speaking, the business of B2B is much easier and more profitable than that of B2C. This is the reason why many people objected to going into B2C market,” Guo Ge explained.

After careful consideration, the top exec-utives led by Guo Ge chose the latter path. Although desktop 3D printers don’t have multi-functions and meet high specifications like industrial-level products, their conve-nience and operability greatly surpass the giant industrial printers. More importantly, this move opened another source of market demand for Tiertime– millions of ordinary consumers.

They had made a bold decision, but Tiertime still moved slowly. To play a safer marketing strategy, Guo Ge decided at first to launch UP! abroad. By inviting agencies, they delivered goods to overseas markets in batch bulk. The reason was that, first, individual consumers overseas have stron-ger consumption capability; second, the DIY culture is more open overseas. In America and Western Europe, DIY also rep-resents fashion.

“We wanted to do some publicity over-

Because they “suffered a cold welcome” in the marketplace

for such a long time, the management strategy of the

company in the past was simply to keep itself stable.

IT ❷ Tiertime

太爾時代

Profit 2012

$8 millionAverage Profit growth rate

for 2010-2012

49%Profit growth rate forecast in the coming three years

50%

No.

2


seas first. After our position was consolidat-ed, we would launch it at home. It’s because back then we had industrial-level 3D printing equipment as support and we didn’t want to give that up.” Even in this intense strategic transition, Guo Ge was still playing things conservatively.

However, UP! was not a dominant prod-uct among the similar products abroad though at that time it was dominant in the domestic market; RepRap, 3D Systems and Makerbot were more recognized. However, Guo Ge was confident in the company’s approach. He believed that with many years’ experience in cost control, Tiertime could make the best products at a lower cost. Thanks to his market awareness, UP! 3D printers with fine quality soon gained acceptance in overseas market. UP! 3D printers produced by Tiertime were ranked first in a review of the best 3D printers pub-lished by MAKE, an American magazine.

Choosing AffordabilityIn 2011, UP! began to be sold in the

domestic market, one and a half years after its launch overseas. At that point, Guo Ge made another important decision. He low-ered the price of UP! to less than $1,600, which seemed baffling, as Tiertime didn’t have any competitors at the time. Generally speaking, voluntarily lowering prices is done when fierce market competition is occur-ring. Guo Ge believed that the reason why there was no competition was that the mar-ket was too small. If the company didn’t expand the market, it wouldn’t make much money even though its profit margin was high. He wanted to sell 3D printers that most people could afford.

The adjustment in pricing changed Tiertime’s marketing strategy. “That a machine can be sold at a price of less than [$1,600] has created a transition point. Can we still sell it the way we sold it at [$16,000]? The marketing team was con-fused. Guo Ge and his team conducted many surveys and found that customer ser-vice and after-sales service were the main

selling points for consumer 3D printers. The machine is small, but it provides users with a totally different experience.

Later, the marketing team found that the small 3D printers can print layer by layer and stack, completing the details that tradi-tional forming technique cannot achieve. Once coming on the market, 3D printers were popular among modeling “geeks.” Hence, the sales department decided to popularize them by targeting 3D printer amateurs, schools and companies, paying special attention to cultivating potential users by building online platforms for ama-teurs to share their experiences and model-

ing documents. In 2012, Tiertime held many user events at coffeehouses and bars in big cities where the geeks gathered, helping to popularize UP!.

Tiertime then took on some risk through a series of reforms. In recent years, there have been many pirated 3D printers assembled through commonly available parts using Open Source software on the Internet. These machines can be sold at prices as low as $640 to $800 on the e-commerce site Taobao. Guo Ge thought, however, that, when compared with pirated printers, Tiertime printers have their own advantages, including an after-sales service system. “You can sell several hundred pirated machines on Taobao, but when it comes to several thousand, you must change your business model, because the after-sales service couldn’t meet the demand. What’s more, others will copy your products when you come to a certain stage.” Guo Ge didn’t worry about the high-end industrial printer market that Tiertime held. He thought the previous technology accumulation could create a certain barrier, as future 3D printers would divide along two paths. Industrial 3D printers would become more high-end while consumer 3D printers would become more common; thus, a middle-of-the-road approach would not be promising. After a transition of near-ly three years, 3D printers began to show their market potential in popular consump-tion. Currently, Tiertime is ranked first among the domestic 3D printer in the con-sumer market. Guo Ge disclosed that last year the company sold 5,000 consumer 3D printers, but only 200 industrial printers. The sales volume of consumer-level 3D printers has surpassed those of traditional industrial 3D printers, which marks the completion of Tiertime’s challenging transi-tion.

Guo Ge isn’t satisfied with such achieve-ments. He believes that the number of 3D printers will surpass that of traditional paper printers, and that 3D printers will find applications in every house and office.

Although desktop 3D printers don’t have multi-functions and meet high specifications like

industrial-level products, their convenience and

operability greatly surpass the giant industrial printers.

IT ❷ Tiertime

Mobile ❸ 91 Wireless


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91 Wireless:NeverlaNd GroWiNG rapidly iN secoNd-Tier ciTiesChoosing to “lose control,” 91 Wireless offers freedom and support to small teams, while problems and logistics are handled by the management. By Yuan Yin Photos by Chen Ruibiao


91 Wireless doesn’t seem to have experi-enced a tough period of output capacity. Its chairman, Liu Dejian, believes that as long as he has a Neverland like Peter Pan had in mind, he will not face dire financial deci-sions. He said, “91 Wireless didn’t [experi-ence] a particularly painful time, but looking back, it was suffering every day.”

Several buildings are being demolished in an old street in Fuzhou City. There is a small shabby building in a humble yard which has become the Neverland for 91 Wireless. Once you cross the strictly guarded access area, whether you are a fan of science fic-tion, movies, music, cartoons, technology, otaku, literature or electronics, you can find a rival for the collections or gadgets in any museum.

The owner of this castle is Liu Dejian. He is the most skillful of the company’s “big kids,” and most of the gadgets are located in his two-story office with an area of 500 to 600 square meters. The other big kids call him DJ, not only because it is an abbrevia-tion for his name, but also as an indication that he is music fan. His gadgets include a Yamaha grand piano. He also has great DJ potential; he can mobilize a lively atmo-sphere among the more than 4,000 compa-ny employees for a long time. He begins work at 4 o’clock every afternoon, has a meeting with senior executives after dinner, goes swimming and plays ball with employ-ees after “lunch” and works with them for several hours after taking a bath. During the Spring Festival, DJ will give everyone $80 so that they can try their luck—his office is equipped with professional black-jack tables. 91 Wireless will soon be launched in a new park in Changle, Fujian. A group of animals will arrive there before the company personnel. There will be race horses, horses jumping dressage and “Grass Mud Horses” or alpacas.

DJ’s “Neverland” strategy is bringing profitable returns. The total annual income for 91 Wireless was $45.12 million in 2012, with year-on-year growth of 375.7%. While rivals BAT (Baidu, Alibaba and Tencent) are

working hard, 91 Wireless is making profits. It has not been easy in the Internet era. Before the 2013 Spring Festival, the parent company, NetDragon Websoft Inc. (00777.HK), put forward the application for listing 91 Wireless, which was approved by the Stock Exchange of Hong Kong Ltd. It will be officially listed for trading soon.

DJ admits that the company’s 91 Assistant is an imitated and innovative

product. “The Apple product is good indeed, but why are the users forced to adapt to its rules? Our purpose is to challenge authority and provide users with simple and useful products,” he said.

Now “91 Assistant+Android Market” is the third largest platform in the world for mobile content distribution on the Internet, fo l lowing only Google and Apple. Meanwhile, it also has nearly a hundred products including mobile Internet tools, mobile games and the like. In addition, 91

Wireless is building its own developer net-work and centers. The main users of 91 Wireless products are the vast grassroots class, which means that with the pyramid structure of smartphone users in China, 91 Wireless is enjoying the demographic divi-dends of the mobile Internet.

Breaking the “rules” In the industry, there are various fallacies

concerning 91 Wireless. First, that as a mobile Internet company with more than 4,000 employees, it is too large and too heavy compared with small-scale compa-nies employing only dozens of people (the company’s record refutes this). Second, the pace of Fuzhou is several times slower than larger cities such as Beijing, Shanghai, Guangzhou or Shenzhen; the office envi-ronment may be relaxed (the speed of 91 Wireless products is faster than that of the entrepreneurial teams and big companies in first-tier cities). Third, the idea that the future is “small and beautiful” (91 Wireless’ future looks large and beautiful).

91 Wireless was determined to abandon the overbearing management practices of the Industrial Age and push the company forward with Internet geek spirit. DJ is famous for “conniving” with the staff in the industry. Now, whether at NetDragon or 91 Wireless, although employees need to punch in before and after work, there are eight shifts, and they can choose to work at day or night at their discretion. Employees can change shifts every month. DJ’s office door is always unlocked, and the staff can get a drink or play video games and billiards there at any time.

Research and development of 91 Wireless products depends on personal interest. There are hundreds of BUs (Business Units) of different sizes in the company. The smallest BU consists of only a few people. At the decision-making level, 91 Wireless has set up a product committee consisting of seven senior executives with experience in well-known products, finance, markets and channels. With the approval of


91無線

Profit 2012

$45 millionAverage growth rate for 2010-2012

118%

No.

3

“Our purpose is to challenge authority and provide users

with simple and useful products.”


any four senior executives, anyone coming up with something original will be fully sup-ported by the company. A new project lead-er can freely recruit company employees. If someone is willing to join a new project, the original department heads cannot stop the move.

In order to prevent his own opinions from influencing the first-tier development teams, DJ doesn’t set any position for him-self on the product decision-making com-mittee. “Everyone knows that if they have creative ideas, they can consult me. I am a free consultant, but I don’t have the last word,” he said,

91 Wireless has inherited a military-like rule from the NetDragon era. Once a proj-ect is launched, the company has to fully support it as long as the person in charge is strongly enthusiastic. But even if the prod-uct is particularly promising and everyone is optimistic about it, as soon as the product manager loses interest in it, the project is immediately terminated.

“As long as the staff is interested in it, the company will fully support it; but if the product manager loses interest, he can’t manage it well,” DJ said.

some expensive lessonsHowever, 91 Wireless has paid a high

price for this policy. Some large game proj-ects lasted for a year, incurring an invest-ment of more than $8 million to $9.6 mil-lion. “You cannot imagine how much we pay for the lessons. Otherwise, we could make profits of more than [$320 million to $480 million],” DJ said, adding, “Some projects where the product manager has lost inter-est [have] really become lost opportunities for us.”

In other words, 91 Wireless is not a loose organization of angel investors and geeks. The supreme product manager is DJ, but his products are cultural and institutional. “Young people with dreams need a fair environment the most,” he said.

Last year, the performance of all staff members was published in 91IM, and the


fits with the views in Kevin Kelly’s master-piece Out of Control. Indeed, the fact that 91 Wireless chooses to “lose control” is compelled by circumstances. Located in Fuzhou instead of Beijing, Shanghai, Guangzhou or Shenzhen, the possibility of recruiting top Internet experts is very slim. 91 Wireless is short in senior talent, so it must foster and retain more young talent.

As for Neverland, you can also take it as an objective need for 91 Wireless. Two years ago, a cell phone manufacturer offered five times their salary to poach the staff of 91 Wireless. Headhunters employed by BAT rented a room in a hotel nearby and offered 91 Wireless staff 2 to 3 times their salaries. Along with higher salaries, the usual benefits like fitness and massage are offered by BAT. Facing such a situation, DJ must take more creative approaches to retain the talent on whom the company has spent so much energy.

salary rank will also be published this year. “If someone gets promoted and gets a raise, it is definitely not because he or she gets well along with DJ. You can look over performances the past few years to confirm this,” DJ said.

Give freedom and support to small teams and leave problems and logistics to the management. In 91 Wireless, each senior executive has to balance his work constant-ly. On the one hand, executives must achieve better performance; on the other hand, they have to accept 360-degree assessments from their subordinates. Once their subordinates come under too much pressure, management will score badly in such assessment.

Meanwhile what 91 Wireless is doing is exactly what BAT is doing. Whether Alibaba is split into 25 BUs or Tencent has adjusted its organizational structure for a year, the ultimate goals are to keep the company innovative and dynamic and to keep pace with the rapidly changing mobile Internet. The companies will change organizational forms and corporate culture, which basically

“Everyone knows that if they have creative ideas, they can consult me. I am a free consultant, but I don’t have the last word.”

Chinese Food

ORGANIC BOOM IN CHINAVertical e-commerce retailers of fresh food are becoming more accepted by the public, but profits are low due to the high costs of logistics, operations and the like.By Li Chunhui

Photos by Deng Pan

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Every day, couriers from Tootoo deliver fresh vegetables and fruits from the farm to their customers.

Chinese Food


streets of Beijing; the price was from $2.40 to $4.50 per 0.5 kg. These local cherries were lying on flatbed three-wheelers under the blazing sun for quite a long time in the streets of Beijing; meanwhile, their extremely expen-sive American “relatives” were still being snapped up by their fellow countrymen online.

That is the reality. The fresh food market is huge, but the trading volume online is quite small with the selection of products available remaining extremely limited. Food safety issues of public concern and the issues of unmarketable agricultural products concern-ing farmers won’t be solved quickly by the rise of fresh food e-commerce; the involve-ment of Tmall is only quickening the pace of fresh foods becoming luxury goods online. As for the platform-style e-commerce websites, they only increase the variety on offer. It is a gimmick rather than a strategy, so there are no grounds for basing their pursuit of high gross profits on any single item. Relatively speaking, some medium or small-sized verti-cal e-commerce websites are going the right way with strategies such as building a person-al base on their own. This has created oppor-tunities for imaginative, entrepreneurial start-ups and investors.

Food Stands for StatusMany people compare fresh food e-com-

merce retailers with shopping malls and agri-cultural product markets. Actually, the target-ed customer groups for the products of fresh

Benlai sales flow

Fruit selection

Cultivation area Buying

Cold chain

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Beijing storehouse

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$160 million.This trend intensified in 2013. Many great

e-commerce websites in China including JD, COFCO’s Womai, Yihaodian and Amazon suc-cessively set foot in the fresh food industry, and many vertical e-commerce retailers of fresh food such as Benlai, Tootoo, Shun Feng Express’ Sfbest and Fields are all involved in the industry and showing their ability. Tootoo has already established its own production base offline as well.

However, when American cherries were still selling well in July, vendors who were sell-ing home-grown cherries on their three-wheelers could still be seen everywhere in the

The old story of “the imperial concubine smiling at someone riding back with lychees” is now being replayed at the United States Embassy in Beijing, as China continues to encounter serious food safety problems.

On July 2, Gary Faye Locke, the American Ambassador to China, gave a box of cherries produced in the American Northwest to Zhang Yong, the CEO of Tmall. Within 72 hours after these bing cherries were picked from the trees in America, they were trans-ported to China by air, passing through the cold-chain throughout the entire journey. On the Tmall website, they had been presold at a price of $28.64 per 2 kg; more than 20,000 advance purchases were made within only a few days of the offer being posted. This time, the sale of large American bing cherries involved 37 Chinese cities, and Tmall coordi-nated and integrated the resources of over 10 logistics companies to handle their dispatch jointly.

When Ali-series started setting foot in the e-commerce of fresh food, the whole industry was shocked. 2012 was regarded as “the first year of fresh food e-commerce retailers.” In the industry, people predicted that fresh food including fruits, vegetables, seafood products and various delicately packed dried goods and nuts (including many overseas products like large American cherries) will become one of the top four hot products online, joining books, 3C electronic products and clothing. In 2014, sales in China’s e-commerce market for agricultural products are expected to reach

Chinese Food

EmErging markEts insight 27 EmErging markEts insight 27

food e-commerce retailers are not always the same. One example given by fresh food e-commerce retailers comes from contrasting Whole Foods with Wal-Mart Stores.

Whole Foods Market (NASDAQ:WFMI) is the biggest retail supermarket in America selling natural and organic foods. In the finan-cial results for 2Q13, net profits of the compa-ny grew by 20% year-on-year. This outshines the retail industry in America as a whole, whose net profit is growing only in the single digits or even falling, which shows the strength behind developing retail outlets for organic food.

There is no doubt that Whole Foods Market is the “nobility” in retail food circles. The com-pany has a perfect growth record and its retail prices range from 40% to 175 % higher than that of comparable food items in ordinary supermarkets. The middle classes are inter-ested in healthy and organic foods and are willing to pay for them. When Whole Foods opened a branch in Kensington, London in the UK, AA Gill, a famous gourmand in Great Britain, said, “Food is replacing [social] sta-tus.”

Now, this scene is being repeated with the rise of the middle classes in China. Interestingly, Liang Yaozu, CEO of the website Fields, started his business because his food preferences were going unmet. He had lived in America for many years. When he came back to China, he thought the food ingredi-ents were not healthy enough, so he created the Fields website. The current generation in China has a relatively good financial base and the ability to pursue a life style of higher quali-ty, so first Fields started changing its recipes.

As a vegan and a full-time housewife, Zhu Xian has the time and interest in improving her cooking skills, but she is often thwarted in her efforts to buy food ingredients. Although there are Jingkelong convenience stores, Marry Marts and Wu Marts near her home, their food varieties and quality cannot satisfy her.

She was not satisfied until her friends on the BBS for “mothers and children” recom-mended Tootoo to her. From then on, she tried to do online shopping on some fresh

food websites such as Taobao and Benlai. Now, every month she will mainly order vege-tables, fruits and meat online at least twice, spending $32 to $48 per order.

“The food there is fresher, healthier and cheaper with better service, and they can deliver to my house. Food of that kind of qual-ity in supermarkets will definitely cost you more,” Zhu Xian said. She had her doubts at first about online food shopping, but now she loves it.

In Tootoo, there are 90,000 consumers like Zhu Xian, ranging from 35 to 45 years old with upper-middle incomes. They make pur-chases 2.7 times per month, spending an

average of $43 per order. The peak time for orders takes place on Mondays and Fridays.

Different from the low-price strategy selling 3C products, books and clothing used by e-commerce retailers, fresh food e-com-merce retailers generally choose middle- or high-price strategies, keeping their food cheap with good quality. This is due to the high cost of cold-chain logistics and the great losses of fresh food they experience operating their businesses. Thus, the expensive logistics and purchase costs are balanced by high retail prices and high gross profits.

In the past, a company called Yoocai tried doing e-commerce using the strategy of “sell-ing natural vegetables” at a low price, but ulti-mately it failed. This experience has persuad-ed other companies in the same industry to stick to niche strategies. Customer transac-

tions at Tootoo and Benlai average about $32. By mainly targeting foreigners, customer transactions at Fields’ website in Shanghai can go as high as $64 per order, with the annual amount spent by many of its custom-ers running about $16,000.

“Organic food is not the consumption good of the poor or of the rich, but rather that of the middle class,” said Du Fei, the General Manager of Tootoo. Poor people think organic food is too expensive, while people of a higher income level may choose specialty foods. Only the growing middle class can stimulate the development of the organic food market. When the economy is depressed, middle-class people will focus more on their physical health. During the most recent period of eco-nomic depression, the sales volume at Whole Foods increased by a factor of two, and many foreign organic companies had similar growth stories.

As a former general manager of the online business “Redbaby,” Du Fei thinks that “Redbaby” and fresh food e-commerce retail-ers are oriented toward niche markets, so they need to run a detailed-oriented business and pursue an accurate market positioning. As for Tootoo, to judge whether a given cus-tomer is a true customer or not, it needs to see whether not he or she is keen for import-ed meats and seafood.

During the period when fears of dead pigs in Jiaxing and bird flu were high, sales of relat-ed products on the Fields website were rela-tively unaffected. Fields informed customers about the origin and production date of the pork it sold.

The Life of Fresh Food Although customer demands have grown,

what to sell and how to sell it is still a big ques-tion for the various fresh food e-commerce websites.

Since this summer, many taxi passengers in Beijing have noticed that the magazines in the taxis have changed. Though the maga-zine is still named Beijing Walk, its content is a special issue of Benlai, illustrating all sorts of lychees from its website.

“It’s not just a brochure, but our own mag-

Food safety issues of public concern and the issues of unmarketable agricultural

products concerning farmers won’t be solved quickly by the rise of fresh food e-commerce.

Chinese Food


azine,” Dai Shanhui, the General Manager of the Operations Center of Benlai said. Benlai took over the taxi magazine from “Touchmedia.” Today, the magazine is written and edited by the Benlai Team and put in tens of thousands of taxies in Beijing. He also said, “Price is a secret, but it is very competitive. The magazine was set up by one of our friends who is supporting us greatly.”

The overwhelming advertisements of Benlai absolutely show great marketing strat-egies, such as micro-blog marketing, network news, focus media, TV programs and Beijing News advertisements. However, Dai Shanhui said that the company rarely spent money on advertising, but that its friends were ready to help it. Actually, these relationships have something to do with the media resources of Benlai. Yu Huafeng, a founding member of Benlai, who is also known as “Yu,” was once the General Manager of Nanfang Metropolis Daily and Beijing News, and also the Vice President of Sales at Netease. In 2011, he invested tens of millions of dollars to found the logistics company Vtepai and the B2C fresh food vertical e-commerce company Benlai.

The successful marketing lies in the sharp eyes of the “fresh food buyers” who are good at finding fresh goods. Adopting a trade model, Benlai doesn’t have its own farms, but has 20 “fresh buyers” who are busy seeking out fresh food from its origins in the country-side–and even around the world–every day.

A good buyer should have a variety of iden-tities. He or she should be a salesperson, an agricultural expert and a marketing expert with a great sensibility about culture and lan-guage. The buyers of Benlai are traditional supermarket buyers, media journalists and even fashion designers. In the clothing indus-try, the buying system has always been about the wild card of fast-fashion brands.

Before becoming a buyer at Benlai, Li Xiaoduo was the real estate reporter at Beijing News. “Orange,” which first brought fame to Benlai, was signed by him. Most of the time, he’ll stay in the mountain areas of Yunnan and Sichuan to look for special local and seasonal agricultural products. Recently,

he spotted mangos harvested in July and August in Sichuan. Besides seeking good products, he worries most about how to transport them to Beijing while maintaining their high quality. Li Xiaoduo said, “I really enjoy the moment when I visit the fruit orchards, but what bothers me most is how to sort out the logistics.” However, he feels that his efforts are well worth it, every time he finds new products. In accordance with rules of Benlai, he must write a “buyer note” con-taining details on the cultural features for each product he has found.

The emergence of Benlai has surprised this industry by virtue of the creativity of its buy-ers. However, not everyone agrees with this marketing method which keeps creating new “gimmicks.” Du Fei of Tootoo believes that fresh food e-commerce companies shouldn’t attract fresh food customers through lively marketing methods, as they might squeeze out the target customers, disturbing e-com-merce operators’ ideas or even lead enter-prises the wrong way.

This difference in philosophy is related to the diverse product emphases of the many e-commerce companies. The selling points of Benlai concentrate on a selection of fresh fruits, which strongly depend on seasonality; its best-sellers follow the changes in the cli-mate. However, for vegetables and meats, essential materials for housewives’ culinary preparations, the e-commerce companies cannot adopt the same method to guarantee a stable, long-term supply for their custom-ers. Accordingly, after operating in the Beijing market for five years, Tootoo has acquired a 165-acre farm in Pinggu, Beijing and has begun to operate both online and off.

Ninetowns Internet Technology Group Company Limited, the parent company of Tootoo, is a typical Internet company whose main business aims at helping Chinese for-eign trade enterprises deal with their customs declaration software and electronic supervi-sion process. In 2004, after being listed on NASDAQ, the company kept looking for new business directions. The scandal involving the discovery of melamine in baby formula in 2008 pushed Dong Min, Senior Vice President of the company, to think about organic agri-culture, and thus she founded Tootoo.

At first, Tootoo quickly tried to find organic food suppliers among cooperative companies, taking advantage of those dealing with its for-eign trade customs declaration and monitor-ing software. However, Dong Min soon found that while some of these companies dealt in food, grains and other dry goods, few compa-nies dealt in organic vegetables. In the human diet, vegetables play a very important part. Among orders on Tootoo, 30% to 40% of the total goes toward vegetables.

Compelled by necessity, Tootoo had to build its own farm in Pinggu, Beijing. However, this was a really hard road for an e-commerce company to go down, because it needed to fight against natural disasters, find talent, and solve the organic certification problem. “Up to now, we have invested [$4.8 million to $8 mil-lion],” said Dong Min.

Tootoo faced another problem. That is, how to sell the market-ready vegetables? At first, the company also entered into supermarkets. However, on one hand, supermarkets require every brand of vegetables to display a mini-mum number of varieties. Generally, there are 30 kinds. If not, fines will be assessed. Because volume is greatly influenced by nat-ural disasters, plant diseases and insect pests, they could not grow enough of some types of organic vegetables, so Tootoo was forced to pay fines regularly. On the other hand, some supermarkets used unsuitable methods to for displaying high-cost organic vegetables. Moreover, the supermarkets’ customers were not the main customers for organic vegeta-bles. Eventually, Tootoo withdrew from the supermarkets, believing that e-commerce

Only the growing middle class can stimulate the development

of the organic food market.

Chinese Food


was the best way forward for marketing organic vegetables.

After joining Tootoo, Du Fei also found that fresh food is quite different from maternal and infant products. Maternal and infant products are standard, so he could examine the product packaging by viewing it on PowerPoint from his office. Now, he has to come to the farm once or twice a week. After over a year at Tootoo, Du Fei has been able to judge the raw material of organic fertilizer, be it cow or chicken manure.

According to Du Fei, self-made products are the most profitable items at Tootoo. On the one hand, consumers show great confi-dence in its self-made products. On the other hand, as Tootoo controls every stage from production to distribution, it profits twice as much as with purchasing trade products. “If

you buy meats or vegetables that are worth [$16], we can still make a profit. But if you buy that same amount of fruit, I’ll lose money, because fruits aren’t highly profitable and they need to be stored at a low temperature,” said Du Fei. Although it has cost a lot of money to develop an agricultural base, the company can use it for decades. Moreover, the self-operated farm will be supported by the government.

Compared with the Benlai website which promotes its products by giving out free lem-ons as gifts, using oranges as a symbol of encouragement and holding lychee festivals, Tootoo Club is more low-key, so its growth is slower. “One or two star products are of no significance. What food products need is sus-tainable growth. Today, we have oranges, so the clients come to us. If we don’t have

oranges tomorrow, we have to find a new star product. We thought deeply and found we can’t keep any valuable clients this way. What we want is steady growth in our house-hold clientele,” said Dong Min.

Du Fei pointed out that the way fresh food e-commerce retailers compete is not in their marketing capabilities but rather in their sup-ply chain management and product manage-ment, which depends on traditional retailing. For instance, they must sell different products to their customers, that is to say, a fresh food e-commerce website doesn’t need to provide 10 kinds of tomatoes to its clientele. “It is impossible for one person to buy and eat so many types of tomatoes.” However, some products should be complementary to each other. It means, in other words, they can pro-vide symbiotic products such as tomatoes, flour and milk to customers who buy eggs. “It is a big failure to sell only one product at a time to a customer.”

The Way to ProfitSome companies are engaging in what

others gave up. At the beginning of the year when fresh food e-commerce became popu-lar, the Yoocai website wanted to get into the business at a cost of $240,000, which got it wide attention. In fact, in 2009, there was a trend in fresh food e-commerce in Guangzhou where “food baskets online,” “good helper,” “Yiwanjia” and other online vegetable websites appeared. However, most of them have closed down. The pioneers became “martyrs” to the cause. Obviously, it is hard to manage fresh food e-commerce.

We all take risks for our future, which means we admit that we won’t make profits now. So how to eventually make a profit? Supply-chain problems such as the high cost of cold-chain logistics and the high percent-age of goods demanded prevent fresh food e-commerce retailers from making much money.

Admittedly, compared with other e-com-merce retailers, fresh food e-commerce retailers must “make it work.” After all, it is a farm produce online business. For farm pro-duce, the closer the place of origin is to the

The scandal involving the discovery of melamine in baby formula in 2008 pushed Dong Min to think about organic agriculture, and thus she founded Tootoo.

Chinese Food


market, the better the quality and the more confident customers are about products.

“Making it work” embodies cold-chain logis-tics first. Currently, China’s door-to-door cold-chain delivery is in its infancy, so the fresh food e-commerce retailers aren’t finding a suitable third party to provide such services. Some companies once thought about cooper-ating with convenience stores because they have refrigerators as well as multiple branch-es. But they found it didn’t work. “Because we provide tunas requiring -60℃, steak requiring -20℃, and chicken and milk requiring 0℃, we need multiple temperatures to preserve the foods,” said Liang Yaozu, CEO of the Fields website. Obviously, the refrigerators in conve-nience stores can’t meet those requirements.

There was no choice but to build the stor-age and cold-chain logistics themselves. Dong Min said that the company has spent over $4.8 million on storage and logistics.

Before starting in e-commerce, Dai Shanhui, General Manager of the operations center for the Benlai website, devoted himself to logistics. In his opinion, “keeping products fresh” is more complicated and difficult than seeking “fresh products.” Take lychees as an example: After confirming the purchase, they had to investigate the local flight logistics. Second, packaging had to be made to use the storage. They had to decide what kind of box to use, how to maintain its temperature, and how to test the temperature inside the box repeatedly when it is sent to customers. What’s more, it needed fine design. In other words, a small box of lychees costs nearly a dollar in its packaging

The staff at Fields website racked their brains to keep the costs and customer satis-faction balanced. They provide packaging at customers’ door which is rarely seen in the industry. “We complete the first-round of sorting and packaging in central storage. When the distribution workers come to the customers’ houses, they take the products from the refrigerator and pack according to the customers’ orders,” Dai Shanhui said.

Another key point to “making it work” is trying to do local business though intensive farming, which is a lesson taken from many

fresh food e-commerce retailers who paid the price. In order to lower the costs, all the fresh food e-commerce retailers are chasing higher gross profits, but raising the price of their products doesn’t work. At present, it is gener-ally believed in the industry that an average per-customer transaction of about $32 is rea-sonable. As a result, it seems that expansion is the only way forward. Generally speaking, expansion means expanding the products and expanding the market.

Based on practice, Tootoo found that these two types of expansion are “traps.” Retail is a “closed loop” in real supermarkets, so the customers can’t go outside the markets, which makes it easy for them to buy goods.

Therefore, expanding the products gets instant results. On the internet, however, cus-tomers can compare prices easily, and free delivery is increasingly available, so it’s easier to attract customers to other shops. The cus-tomer is not loyal to one shop. For this reason, Du Fei thinks he must highlight his core com-petitiveness and thus opposes blind product expansion. After joining Tootoo, he cut down on products, shrinking the number of SKUs from 4,000 to 3,000 by giving up health-care products, focusing on fresh food direct e-commerce retailers.

“Tootoo took a tortuous path in its develop-ment due to blind expansion and blurry goals,” said Du Fei. Actually, the “tortuous path” included farms in Shanghai and Shenzhen before the farm was built in Beijing. Now it has withdrawn from those two cities.

At present, the Fields website is expanding intensively in the Shanghai market. Taking foreign cases as an example, Liang Yaozu said, “London has Ocado and New York, Freshdirect. Look, if you dominate the market of a big city, you have made a business worth [$160 million].” According to the Benlai web-site, if you took control of the Beijing market, you would possess a market worth at least tens of millions of dollars.

Although it has been difficult to make prof-its, a new day has also appeared. In December 2012, Tootoo achieved profits of $64,000 monthly. Fields has also achieved monthly profits. According to Du Fei, the monthly profit of Tootoo reached nearly $800,000 with 970 to 1,200 orders per month in the first half of 2013. In his vision, the size of orders may increase, the price may decrease by more than $40, and gross profit may also decrease slightly several months later once the company begins to make a profit.

There are various ways to gain profits among the fresh food e-commerce compa-nies. Since the Fields website achieved monthly profits, ensuring the consistent and stable quality of products and services is the urgent matter. As for Benlai with its relatively low prices and unstable orders, expanding its scale is the top priority.

It costs Tootoo $4 to distribute an order of fresh vegetables.

For farm produce, the closer the place of origin is to the market, the better the quality and the more confident customers are

about products.

Indian Auto

FAST FORWARD TO THE

Nissan is reviving the Datsun brand with an eye on the mass market. Will it strike a chord?

By Vishal Krishna & Swati Garg

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Indian AutoIndian Auto

The year: 2010. The place: Yokohama, Japan. The Nissan headquarters was a bee-hive of activity. Renault-Nissan Alliance (RNA) chief Carlos Ghosn was chairing an endless series of meetings to home in on the markets that were expected to bring in the cash for the alliance over the next decade.

Smack in the middle of preparations for the launch of the hybrid Leaf across the US, the deliberations saw Ghosn referring to

project. He also put Cobee in charge of pro-ducing cars for “first-time” buyers in emerg-ing markets, based on his previous stint as the global sourcing head for the Sunny and the Micra.

In many ways Datsun will try to pull off what Maruti did in the 80s—attract the sala-ried class. That love affair has lasted more than 30 years, with Maruti Suzuki today accounting for 38.4% of the 2.62 million domestic car market, despite stiff competi-tion. “The reason we revived Datsun is because a large part of the population in

heavily populated countries does not have the luxury of

choice,” said Cobee, vice-president and head of

Nissan’s Datsun unit.

Frugality in BeingAt present, three

cars are undergoing structural and com-

mercial viability tests at Renault Nissan’s

Technical Centre in Chen-nai with the help of Hinduja

Group’s technology firm Defiance Technologies. The first platform, codenamed “K2” and similar to the Micra platform, will compete in the B segment with cars such as Ford Figo, General Motors’ Beat and Maruti’s WagonR.

Nissan would not confirm this, but sources say that this platform will launch cars at an ex-showroom price anywhere between $5,900 and $7,000. The second platform is codenamed “I2,” and will compete with the Hyundai Eon and the Maruti Suzuki Alto 800.

“We should learn to make good things with limited resources, which is what India and growing economies need.”

CARLOS GHOSNChairman and CEO of Renault-Nissan Alliance

In many ways Datsun will try to pull off what Maruti

did in the 80s—attract the salaried class.

markets that were underserved by the auto-mobile industry—yet were in serious need of aspirational and affordable cars. The hours of brainstorming led Ghosn and his team to decide to revive Datsun, an iconic Nissan brand until the 1980s. In the mid-1980s, all cars were rebadged “Nissan” to strengthen parent Nissan Motors’ presence in the US.

Ghosn then handpicked Vincent Cobee, a Nissan Motors veteran, to head the Datsun


Indian Auto

Sources say this car will be priced between $3,900 and $5,500. This car will be priced slightly above the Nano and will be the cheapest A segment car.

The K2 and I2 will hit the road by 2014 and 2015, respectively, though the former will be unveiled this year. These are the vol-ume segments where Datsun wants to play, targeting close to 200,000 cars a year.

The third platform, which will hit the mar-ket by early 2015, will be a long wheelbase

hatchback similar to the Maruti Suzuki Ertiga. It will be priced between $7,000 and $8,600. According to Cobee, Datsun will see a great deal of localization, with support from Nissan for its sourcing and distribution strat-egy. Nissan is also building an 850cc diesel engine in Chennai. If it is fitted in the K2 and I2 cars, it will be the lowest displacement diesel engine in the country. Cobee, howev-er, revealed that a gasoline engine strategy for Datsun is more likely.

The CompetitionSo, what competition will Datsun face? In

the A segment, Maruti Suzuki’s Alto and Hyundai’s Eon command a market share of 68.9% and 21.3%, respectively. Even the Tata Nano occupies 8.6%of the segment, which saw negative growth of 12.93% in 2012-13. In the B segment, Maruti Suzuki’s Swift and Ritz and Hyundai’s i10 and i20 have a market share of 32.08% and 23.15%, respectively. This segment saw a

Indian Auto

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THE RIVAL PACKDatsun has to take on the high and the

mighty to make the cut.Gain/loss (%)Gain and loss is computed on the basis of cars sold in year 2011-12 and 2012-134.1

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Graphic: Prashant Chaudhary

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GM (Beat)


Indian Auto

negative growth of 6.89%. In the utility vehicle segment, Mahindra & Mahindra has a 45.08% share with its Quanto, Xylo and Bolero. Maruti Suzuki has garnered a 28.98% share with its Ertiga.

Datsun will be relying on history when it hits the market with not just the cheapest cars in a given segment but also cars that meet aspirations. In the late 1950s, in the US, it positioned itself as a brand which had style, power and space, and which appealed to first-time buyers. Now, those very same attributes are in demand in countries such as India where buyers are looking for cars that aren’t just cheap but also have features of higher-end cars such as good acceleration, ground clearance and mileage.

“When I see the engineers building our cars in Chennai, I am reminded that it’s peo-ple like them who are our target market. It is they who are aspiring for modern styling,

Indians felt the A segment didn’t match their aspirations because of the limited choice,” said Kumar Kandasami, director at Deloitte Touche Tohmatsu, a global consultancy.

Frugal EngineeringDatsun fits perfectly with Ghosn’s concept

of “frugal engineering,” a phrase he coined to describe Indian manufacturing. He elaborat-ed on his coinage when he met with Business Week in 2010: “We should learn to make good things with limited resources, which is what India and growing economies

need.” In fact, Renault Nissan’s partnerships forged with

Ba ja j , M&M and Ashok Leyland

appear to be aimed at learn-ing from them so as to be able to intro-duce cars in

the A-plus seg-ment. Besides,

Ghosn expects the Indian car market to

touch six million cars by 2018; the alliance needs a mass

market car to tap that potential.Datsun will also give Nissan a much-need-

ed push toward occupying different seg-ments of the consumer wallet. Globally, it has the luxury brand Infiniti; then it has its own brand of cars for the semi-premium

Datsun will see a great deal of localization, with support

from Nissan for its sourcing and distribution strategy.

10The number of “made in India” cars that RNA will have in the country, once Datsun is launched

Indian Auto

better acceleration and quality,” said Cobee.The fall in sales in the A segment and the

poor showing by Nano in 2012-13 are testi-mony to how the Indian automobile buyer thinks. While the Nano’s sales fell by 27 per-cent, Alto’s fell by 12 percent. Even in the B segment, competition has been intense (see chart). But cars such as Maruti’s Swift DZire have continued to defy gravity. “The A seg-ment has been hurt for two reasons: first, fuel costs have gone up; and second, many


Indian Auto

customer, and, finally, it will have Datsun for the value-seeking customer. “There is a mar-ket for low-cost cars if well thought through,” said Deepesh Rathore, MD of IHS Auto-motive India, a consultancy.

Datsun’s rollout will leverage Renault Nissan’s 130 suppliers in Chennai while utiliz-ing the plant’s capacity to the maximum. The current capacity is restricted to 200,000 units for both Nissan and Renault. By the end of the decade, Datsun will double the capaci-ty to 400,000 units. This will be roughly 8% of Nissan’s current global capacity of five mil-lion units.

“The Indian market must be understood in the context of the long term. You need to launch cars with the lowest cost of owner-ship,” said Sandeep Singh, MD, marketing, Toyota Kirloskar Motors. He said that unless the service element is right, a brand cannot win. “You need to keep building your back end to bring down the cost of service,” added Singh. This explains why it has taken Cobee three years to design platforms that can be launched simultaneously in Russia and

Indonesia. Datsun will ride on Nissan’s 100-odd dealerships. It might even have some dealerships of its own in smaller towns. “It is important to convince the customer that the Datsun brand is unique and localized. The Indian customer knows that the alliance’s cars are more or less similar,” said Shrawan Raja, managing editor of indianautosblog.com.

So will this three-brand strategy succeed? Analysts say RNA is better poised to win the customer over with its focus on different consumer sets. It has seven cars in the mar-

“Using the same platform and engine does not mean that the cars are the same.”

VINCENT COBEEVice-president and head of Nissan's Datsun unit

Analysts say RNA is better poised to win the customer

over with its focus on different consumer sets.

It has seven cars in the market which are made in India.

ket which are made in India. With Datsun, the tally will go to 10. In comparison, Volks-wagen has three cars; GM and Hyundai, seven each; Ford, four; and Toyota, five. Only Maruti has more than 10 cars. In a short span, RNA has hit the market with dif-ferent products, and it has had some suc-cess in scaling up. Renault has seen a winner in the Duster, which sold 39,188 vehicles in the eight months since its launch in 2012-13. Similarly, Nissan’s diesel sedan Sunny has sold 23,988 units, a 40% rise over 2011-12. RNA has also introduced cars built on the same platform, such as the Pulse and the Micra—though there has been a lot of criti-cism that they are the same cars with a dif-ferent badging.

“Using the same platform and engine does not mean the cars are the same. The Nissan Juke and the Renault Megane, when you drive them, are different cars,” said Cobee. RNA has everything from a powertrain facili-ty to a vehicle assembly at the Chennai plant to take on its rivals. Datsun’s closest rivals will be Ford and GM and not Toyota or Honda.

The alliance has localized diesel engine production which too can work to its advan-tage because Toyota and Honda still import theirs. Though Ford and GM have localized production of their diesel engines and plat-forms, they have had a sluggish business year. Also, the diesel advantage may not last long with the difference in gasoline and die-sel prices narrowing.

Datsun will need to do something out of the ordinary to be popular in India. “India is complex and it is with humility that I accept that we aim to be perfect. ... Japanese com-panies work with hard facts before we launch a car and this is where we feel that we will do well,” said Cobee.

Ghosn has chosen to keep it simple: make local products for local tastes with a coherent brand strategy. But in aiming for the bottom of the pyramid, Datsun has to tread careful-ly. The Nano should serve as a stark remind-er of where ideas can end up, even if they come with the best of intentions.

Travel Time

Panorama Group has evolved from a simple travel agency into a sprawling business empire that deals with tourism,

transportation and the hospitality business. By Albert W Nonto

Indonesian Travel


data

Panoramais a travel company in Indonesia. It was founded by Adhi Tirta wisata in 1972. Its line of business covers travel & leisure management, conven-tion & exhibition, trasportation and hospitality. It has more than 3,500 staffs with more than 100 offices in Indonesia and abroad. Budi Tirta wisata (right), the son of Adhi Tirta wisata, is the CEO of Panorama now.


Indonesian Travel

Other people’s holidays and travel plans are hard work for companies like Panorama. At its head office in West Jakarta, ticketing and reservation staff can work for 24 hours at a stretch to meet the travel needs of their clients.

“We have to work eight months in advance to arrange travel for some of our clients who have been with us for more than 10 years,” said Budi Tirtawisata, president and CEO of Panorama Group, adding that some companies now provide foreign or domestic trips as a bonus and incentive for employees.

It’s quite an incentive: He noted how excited his own staff members are when they travel together and build relationships that might never occur back at the workplace. “Tourism makes people happy, and we are in the business of helping people realize some of their dreams,” said Budi. It’s also proved to be excellent business for Panorama.

The founder of the group, Adhi Tirtawisata, is now 80 but still passionately nurtures the company, not only for the benefit of the group itself but also to help Indonesia establish strategies to develop the tourism sector. Despite his age, he still travels regularly. “His passion is the tourism business, and he still has a big appetite for travel,” said Budi, the second generation of the family business.

Adhi admitted he is surprised by the group’s growth. “I am confused, I never imagined that this company could become what it is today, with the number of people working here growing every day and lots of parties coming to us to be in partnership or different purposes,” Adhi is on record as saying.

That surprise is understandable. After all, 40 years ago the company had just 20 employees and was just another small travel agency helping tourists–mostly foreigners at that time–to travel in Indonesia. Now, Panorama is an integrated tourism business with three main activities: tourism, transportation and hospitality.

redefining its Business Position The Panorama Group did not grow into a

diversified tourismrelated business without some serious thought and effort. Besides simply responding to the needs of a vast range of customers, it needed a strategy for growth.

From a simple travel agent business, the group now consists of a sprawling business with interests in tourism, transportation, hospitality and ecommerce. At the end of 2012 the company had booked around $2.37 million, up from $1.84 million.

Budi said business redefinition was part of the growth process, not least in strengthening the group’s position in responding to the growing opportunities in the tourism business in Indonesia.

Some operators may be big in the meeting, invention, convention and event (MICE) business, like the Kompas Group, while oth

ers may be big in the travel agency business, he noted. “We are the only group which is clearly defined as the most integrated tourism business, even though we don’t make any claim to be big in this sector,” said Budi, himself a former banker.

In domestic tourism, Panorama operates in inbound tours, leisure and MICE. In this sector, said Budi, the group organizes trips for around 200,000 visitors a year, booking about 1 million room nights per year with an average length of stay of about seven or eight days.

To manage the soaring demand in the travel business, the group has marketing and sales offices throughout Indonesia. Budi believes the key to success is to stay close to customers, although ecommerce helps capture mobile and younger customers.

With ambitions to join the ranks of international players, the group has opened sales

Hotels Group/owners Total Plan

Sahid Hotel Sukamdani Sahid Gitosarjono 27 50

Kagum Hotel Henry Husada 27 10

Santika Jacob Oetama/Gramedia 23 10

amaris Jacob Oetama/Gramedia 21 10

ariyaduta Hotels Lippo Group/Mochtar Riady 9

Sofyan Hotel Sofyan Ronda and family 7

Pullman Hotel Agung Podomoro 2 10

LocaL riSinG STarS

“We are the only group which is clearly defined as the most integrated tourism business, even though we don’t

make any claim to be big in this sector.”

Hotels Group/owners Total Plan

ibis Accor Group 56 50

aston Hotel Archipelago Group 27 50

Swiss-Belhotel Swiss-Belhotel International 23 58

Golden Tulip Louvre Hotel Group 15 20

Hariss Hotel Hariss Hotel Group 13 21

radisson & Park inn Panorama Group & Carlson Rezidor 5 20

Source: Globe Asia Research

inTernaTionaL PLayerS


Indonesian Travel

The founder Adhi Tirtawisata (right) and his son Budi, who has served as CEO since 2009.

has long had ties with Chan Brothers, one of the biggest travel agents in Singapore, and Carlson Wagonlit Travel, a worldclass operator in travel management. In transportation the group has enjoyed a lengthy partnership with GrayLine, while in ecommerce for hotel reservations it uses its own rajakamar.com and bookpanorama.com as well as Asian Trails and MG Holiday.

Budi believes ecommerce will develop strongly in the country. Only 6% out of 60 million Internet users in Indonesia use the Internet for business, and while Budi admits

premium taxis and coaches. It is the agent for Europcar rental and limousine hire, and GrayLine and Day Trans buses, serving big cities in West and Central Java.

When Budi took over the helm of the group in 2009, he was determined that all business activities were related and supportive of each other. The linkages are clear: As the biggest travel management company in the inbound sector, for example, Panorama has a strong grounding through its hotels and restaurants throughout Indonesia.

For its international presence, the group

branches in China, Thailand, Malaysia, Singapore and France. “Our aim to be an international player needs to start from here,” said Budi.

In the MICE business, he claimed the group is among the top five players with institutional customers such as heavy equipment producers, pharmaceutical companies and a franchise and business opportunities expo which is held annually. In order to strengthen its position in the MICE business, early this year the company agreed to cooperate with worldclass operator Reed Exhibition.

The transportation business is handled by subsidiary Panorama Transportasi, which operates a fleet of 1,000 vehicles, including

Panorama has a strong grounding through its hotels and restaurants throughout Indonesia.


Indonesian Travel

he is a greenhorn when it comes to IT, he is planning to invest heavily in ecommerce by boosting the group’s own portals. “It is not only a question of buying servers but also preparing people and educating them to use the Internet for tourismrelated activities,” he said.

Hospitality Credentials Budi believes the hotel business is another

major plank that will contribute to growth in the future, and one in which it is most important to implement the right business strategy. The group’s hospitality unit set up its first hotels three years ago in Jakarta and Bali’s trendy Seminyak area with fourstar properties, using The Haven brand for its condo concept hotels.

Another four hotels are operated under the 101 brand while PHM Hospitality is a hotel management business. The group plans to add some 30 hotels to the portfolio over the next five years. “We are partnering with different businessmen and using different names,” said Budi.

Most recently the group agreed to partner

with Carlson Rezidor Hotel Group to build and manage some 20 hotels under the Radisson and Park Inn flags. For Budi, the opportunity to work with a worldclass group with thousands of hotels around the world is a sign that Panorama has chosen the right business strategy in its hospitality operations.

Carlson Rezidor has a strong record in hotels, travel management–with an emphasis on corporate travel–and the food and beverage business. “The group was searching for a partner here that is strong in corporate travel management, an area we have concentrated on for more than 15 years. Add to that the fact we have already known each other for a long time,” said Budi, explaining what he describes as a natural fit. Carlson’s clients in Indonesia, such as oil and gas companies, will now be directed to Panorama.

While continuing to grow its own brand name, Panorama sees that becoming a partner with a worldclass hotel operator will give its customers a multitude of choices. For instance, international customers coming to Indonesia will be able to stay with Radisson,

which is present in 81 countries in the world. “Some local customers are also very

Western brandminded, so we provide them with the name,” said Budi. For customers who don’t count on brand name but still want a high quality of service, the group is also developing its own hotels. “I am proud of our brand,” said Budi with a smile.

Something from NothingSaptono A Irawan, vice president for

investment banking at BII Maybank, sees huge room for the group to grow further in the future and credits its integrated business model as a main source of its strength. “The group’s expansion is related to and supportive of its core business of tourism, which in turn is relevant to boosting its business model as an integrated tourism player,” he said.

Saptono has long watched the group’s progress and sees it as a reflection of the owner’s passion for the industry and his deep understanding of the nature of the industry. These two characteristics have been essential in producing the Panorama

STronG GrowTH in HoLiday-maKerS a growing middle clss is looking for fun.

9.6%growth in the tourism sector over the past six years

60%of foreigners visiting Indonesia were holiday makers while MICE travel grew by 40%

4.9%growth in star-rated hotels of which 15% were three-star hotels, followed by 5-star hotels (11.9%) and 2-star hotels (7.1%)

22%growth of restaurants in Banten, West Java, South Sulawesi, Riau Islands and Bali

16%of tourists who visited West Jawa Province, followed by East Java (13.2%), Jakarta (11.8%) were domestic tourists, while foreigners preferred Bali, Jakarta and Riau Islands as their favorite destinations.

Source: Ministry of Tourism and Creative Economy (2012)

10.9%and 13.3% increases in domestic and foreign passengers

87%out of 57 million tourists in the Indonesian archipelago in 2012 were Indonesians

Some new places have been growing remarkably such as West Nusa Tenggara (Lombok), Central Kalimantan, Gorontalo, Riau Islands as well as Bali.


Indonesian Travel

Group of today. Saptono agrees that the group has more

room to build on opportunities in the sector by creating new tourism packages and new destinations. “Tourism is about creating something from nothing,” said Budi, in an effort to define a new approach to the tourism and hospitality business.

With Panorama claiming to be the only truly integrated player in the industry in Indonesia, Budi is confident about the future. He admits that critical issues are the availability of infrastructure, reliable transportation services and a supply of good people for the industry.

He claims to have no clear data on the market share of each player in the industry, but suggests that inquiries should be directed to Garuda to find out the number of transactions per year. “I received a report from Garuda that as a travel agent we still have a big chunk of the pie,” Budi confirmed.

BII Maybank, which was involved in a recent group bond issuance, supports the business plan. Others agree: “It is the oldest and largest vertically integrated tourism firm,” said Kim Eng analyst Adi N Wicaksono. “The company not only provides inbound and outbound tourism services but also offers transportation and support for the MICE industry to boost growth.”

But, warned Adi, a slowdown in global or Indonesian economic growth, business competition, foreign exchange and political and security risk are some of the risks facing the group.

making more of miCe In the MICE business, Saptono sees com

petitors like Dyandra Promosindo of Kompas Group helping to boost the nowbooming MICE business in Indonesia. The two companies’ target markets are slightly different, with Dyandra concentrating on individual customers and the consumer goods industry, including the automotive and property sectors. Panorama deals with the institutional market. Both should benefit from growth of Indonesia’s middle class.

Adi cites data from the International Congress and Convention Association which puts Indonesia in 39th position in the global MICE market with 66 events in 2012. In the region, Singapore was the best achiever with 130 meetings, followed by Thailand with 100. The Philippines and Vietnam were further down the list among ASEAN countries.

“The MICE industry always creates an impact on other industries such as hotels, transportation, entertainment, garments, media and restaurants. Of course it also boosts the length of stay, which in turn can stimulate the provision of better infrastructure,” said Adi.

Based on 2013 World Economic Forum data, Indonesia ranks 12th in the travel and tourism competitiveness index in the Asia

Pacific region. But, said Adi, its ranking was considerably lower in other categories such as tourism infrastructure (113), land transportation (87) and information and technology (87). “This is the real picture that shows where all parties, government and industry, have to work hard.”

A full 80% of Panorama’s revenues still come from the travel and leisure business, but the group sees that in the future its hospitality and MICE units will make higher contributions. Adi said the hotel group should be able to deliver 30% of revenues by 2017, acting as a gamechanger for the group.

Budi intends to keep focusing on this sector. “We have to be focused, have loads of patience and passion and never be tempted to get into businesses where we don’t have expertise. There is still a big pie [in tourism] for us to grab a share,” he said.

In his old age, Adhi is happy to see his four children all helping to grow the Panorama Group. “I am happy because finally they have come home to make this company an everlasting business that still focuses on tourismrelated business,” said Adhi in his book Mozaik Kehidupan Seorang Adhi Tirtawisata.

In the book, he warned that any company will face problems if it is poorly managed. He relies on his children to build the business in a sophisticated way and ensure that it retains a high sense of responsibility to its customers and its own staff.

The tourism business can only be successful if it is built on a base of reliable infrastructure, good service, clean and attractive tourism destinations, security and safety, Adhi believes. “Tourists don’t care how this happens.

The important thing is that when they visit everything runs smoothly, is safe and comfortable. Tourism is about the client, and the client is king, who can do no wrong. Full stop, with no exceptions,” he writes.

“As an industry dealing in the service business, someone has to be able to generate beautiful memories for the guests,” he pointed out.

TaPPinG middLe-cLaSS waLLeTSaccording to the 2012 consumption

behavior index, nearly 13.1% of a middle-class family's income is spent

on leisure-related activities.

hotels & catering

household products

education

alcohol & cigarettes

food & non-alcoholic drinks

housing

recreation

other goods & servicescommunications

clothing & footwear

transportation

health products & services

Source: Bank BNI 2012

5.8%

7.1%

41%

17%

1.7%2.2%

2.1%

3.6%

2.5%

3.6%

7.3%

5.2%

“We have to be focused, have loads of patience and

passion and never be tempted to get into businesses

where we don’t have expertise.”


Brazilian Industry

Business leaders are realizing that protectionism has not worked and they admit it; to increase productivity, they should be more open to the world. By Humberto Maia Junior

It's tIme to embrace competItIon

Syn

dic

atio

n/E

XaM

E p

ho

to/S

hu

ttEr

Sto

ck

Soccer fans know the saying, “Fear of losing takes away the hunger to win.” Brazilian industry has always played defense when it comes to foreign trade. All efforts have been focused on making it harder to import, and exporting was never a priority. For this reason, Brazil’s share of international trade has been around 1.2% of the GDP since 1950.

“The industry in the country has always preferred the domestic market where they made good profit without competing with more efficient foreign companies,” explained Albert Fishlow, an economist from the Center for Brazilian Studies from Columbia University in New York City. For all that, it is surprising (in a good way) that there is an initiative by the country’s industry itself to be

more commercially open. “[Some] businessmen realized that if things continue the way they are, everyone will lose,” said economist José Roberto Mendonça de Barros, a partner at consulting firm MB Associados.

Entities such as the National Confederation of Industry (Confederação Nacional da IndústriaCNI) and the Institute for Studies in Industrial Development (Instituto de Estudos para o Desenvolvi mento IndustrialIedi), in addition to sector associations and unions, have begun to realize that in order to increase productivity and reverse its slow decline, Brazilian industry needs to participate in global trade.

“To defend the domestic market on behalf of manufacturers operating here, alone, has

not and will not be enough to increase the productivity of the country. There is need for more competition.” This opinion is not that of an economist from the University of Chicago, an institution with a strong liberal bias; it is from Pedro Passos, CEO of Iedi. At 62, the cofounder of the cosmetics manufacturer Natura is perhaps the main leader of this fight. Iedi has argued with the government and companies about the need for Brazil to achieve free trade agreements with other countries–along with CNI which earlier this year released the “Mapa Estratégico da Indústria 20132022” (Strategic Map of Industry 20132022). In this document, in addition to attacking the famous makers of the Brazil Cost–crippled infrastructure and


Brazilian Industry

bureaucracy–CNI calls for the implementation of free trade agreements among the most urgent actions. “One of the reasons for the loss of competitiveness of the industry is the technological gap, a negative effect for not having internationalized our companies,” explained Carlos Abijaodi, Director of Industrial Development at CNI.

Has the penny Dropped?Brazil has increased its protectionist mea

sures in the last few years; but has not improved the industry scenario, which remains relatively uncompetitive.

Until recently, in regard to fostering competition, Brazilian industry sought only low interest rates and favorable exchange rates. A willingness to participate in global competition for markets is quite an improvement. And it makes sense. For example, Alpargatas products will be taxed by 18% when entering the European Union starting in 2014. Should there be a free trade agreement Havaianas sandals would continue to cost their average price today, $36.50. “Two things always work best when they are open: parachutes and economies,” said Márcio Utsch, CEO of Alpargatas. There are other advantages in open trade: “Foreign competition forces companies to become more efficient and offer better products,” said Danny Leipziger, Professor of International Trade at George Washington University in Washington, DC. It’s easy to understand: A company that does not offer competitive products in terms of price and quality as those of its competitors is doomed to lose market share.

“That’s why open trade brings benefits that go beyond access to new markets,” said Rogelio Golfarb, VicePresident of carmaker Ford. One of these benefits is reduced cost of capital. An opening that took place more than 20 years ago resulted in machinery prices dropping by 52% from 1990 to 1995. Today, local industry is burdened with a price of steel double that in the U.S.; this new open trade would cut such costs.

What’s behind the change of attitude on

They don'T workBrazil has taken various measures recently to protect the domestic industry. But the situation doesn't seem to be getting better.

54321

Defense Package

Higher Fees

At MaximumLimit

Special Price

Over 40 measures were taken to defend Brazilian industry from foreign competition during the Dilma Rousseff Administrationalone.

One of the measures taken was to increase import fees of 100 products.It expires in October.

Imported clothing and footwear are taxed at 35%, the maximum allowed by the World Trade Organization.

The Ministry of Health has opted for paying up to 25% more for Brazilian products than for similar imported ones.

The Government will grant tax incentive for carmakers that execute at least 6 out of the 12 steps of car manufacturing in the country.

Brazil lagged behind by not signing tradeagreements with other countries(number of free trade and sector agreements signed)

And the trade agreements signed by the country grant preferential access to 10% of the global trade total only(access potential to markets through free trade agreements signed)

Chile Peru Mexico BRAZIL South Korea

37

26 2522 21

82%

73%

63%

31%

45%

30%

10%

Chile

Peru

Mexico

South Korea

EU

China

BRAZIL

100

2007 Jan/2008 Mar/2010 Jan/2013Dec2012

194

126.3

103.8

130.6 129

Brazil tries but can't prevent more products from entering the country (imports of manufacturing goods, in USD)

The Industry has been stagnant for over three years(industry production index level, Base 100 = 2002)

32,400

21,150

22,050

13,950-47%

-35%-30%

BRAZIL

Argentina

EU

USA

Still the costs remain high for Brazilian industry(price difference between imported and national products)

... for customers(price of a Honda Civic, in USD (1))

Steel(USA)

MiningEquipment

(China)

Engines(China)

(1) Date from February 2011 Sources: Bain&Company, World Trade Organization, Global Trade Alert, Ministry of Development, Industry and Foreign Trade, IBGE, and Roland Berger

Price Strengthened


Brazilian Industry

cient of the group, which has 25 plants worldwide. When tax burden and logistics costs, in addition to other Brazilian “disasters,” are accounted for, their competitiveness vanishes.

“If we open our market without competitiveness …, many industries will disappear,” said Franklin Feder, CEO of Alcoa. Another constraint relates to countries like China and Bangladesh. “We cannot compete with those who subsidize exports, have artificially undervalued exchange rates and low cost of labor by offering poor working conditions,” explained Dominic Mosca, Coordinator for the Industrial Area of the Brazilian Association of Textile Industry.

“None of this should be [an] impediment to more openness,” said Pedro Passos. It is impossible to please everyone and losses are inevitable. But, in the end, Brazil will profit.

the part of business leaders (but not all of them) is the fact that Brazil has become a more protectionist country in recent years, a stance which has not helped its industry. According to the research center Global Trade Alert, the country has adopted 36 antiimporting measures since 2009. That is more than the 28 countries of the European Union combined have done. Brazil lagged behind by not signing free trade agreements with neighbors Chile and Peru. Even isolated industrial production is at the same level as of three years ago.

Sectors that have tried to protect themselves from foreign invasion with high import tariffs have lost market share. In 2010, shoemakers produced 894 million pairs of shoes and employed 349,000 people. Last year, production dropped to 864 million pairs and the number of employees to 330,000.

“We need to gain new markets,” said Heitor Klein, CEO of the Brazilian Association of Shoemaker Industry.

open, but carefully This new attitude in the business world is

not an “ultraliberal” wave of defense from unrestricted and immediate opening. What is being asked for is a more comprehensive competition policy. Take the case of Alcoa, an American aluminum manufacturer. Its two plants in Brazil are among the five most effi

What’s behind the change of attitude is the fact that Brazil

has become a more protectionist country in recent years.

Protectionism splits the election of the federation of industries of Rio de Janeiro. By Alexandre Rodrigues

The election for the President of the Federation of Industries of Rio de Janeiro, held Aug. 19, was a f ight between protectionist businessmen and those in favor for more openness. The latter was represented by Eduardo Eugênio Gouvêa Vieira. Head of the organization since 1995, he has always won elections with no opponents. This year he finally faced one: Ariovaldo Rocha, President of the National Association of Shipbuilding Industry. Mr. Rocha leads the defense of protectionism. The flagship of his campaign is the lobby responsible for the reopening of shipyards in the country, with official help. The industry, which had 1,900 employees back in 2001, now employs 70,000 people. Partner in a shipyard in Niterói, Mr. Rocha was a key member in the creation of local content policy requiring Petrobrás and other oil companies to buy ships and platforms manufactured in Brazil. In 2002, he personally sought out the then candidate Luiz Inácio Lula da Silva,

who came on board. Concerning delays in deliveries and the higher prices charged by local shipyards, Mr. Rocha said they are offset by job creation; and he advocates similar protection to other sectors, [facing] what is called a “flood of imported goods.” He said, “Before [opening] to foreign market, our cost needs to be internationally competitive.”On the other hand, Mr. Vieira has always been a dissenting voice among industry leaders. He talks less about protectionism and more about competitiveness. And this is the

keynote of the majority of surveys conducted by FIRJAN such as quality assessment of the services at cargo airports. Mr. Vieira advocates for greater participation of Brazil in global trade, with market reserve for strategic sectors only, such as oil industry. “Of course we need to keep jobs, but Brazil has been an island in the world and it did not work out,” he explained. “People want the best products at the lowest prices.” Ultimately, Mr. Vieira was successful in

winning re-election.

Mr. Vieira won re-election defeating the protectionist candidate.

Split in Rio de JaneiRo

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