Charoen Pokphand, an agribusiness conglomerate whose activities range from chickens to telecoms, is at first sight an unlikely contender for the position of China's biggest foreign investor.
CP is a relatively low profile company, with the sort of opaque financial reporting that hinders fund raising on international capital markets. Its name does not adorn flashy Shanghai skyscrapers and is more often linked with foreign companies than the cream of corporate China.
And yet, with investments in China of over US$2bn, the group has serious clout in the mainland. It recently opened a new headquarters in Shanghai and claims to be the first foreign company to invest after China opened its doors in 1979. As proof, the group holds business registration certificate number 0001.
To the company's top management, who are predominantly ethnic Chinese, these investments represent a return home. They also reflect commercial reality, as demonstrated by the company's core revenue stream: day-old chicks and the chicken feed that fattens them up into dinner table roasters. CP talks of the correlation between the consumption of chickens and GDP growth: two chickens a person a year are eaten by Chinese, compared with nine in richer Thailand.
The chicks-and-feed business demonstrates the backbone of the Thai group's strategy: vertical integration. Blocks of the core agribusiness build on top of each other. Further down the line, chickens are used in some of the group's Thai fast food restaurants ? the Chester's Grill and Five Star Chicken chains.
"Vertical integration is absolutely crux to increasing profitability," says Mr Nam Park, analyst at ING Barings in Hong Kong. "That's why the company has pursued the strategy of day-old chicks, chicken feed and meat processing, which is the standard regime of things in developed countries like the US where you find it is used in the majority of agricultural operations."
For China, the nature of the core agribusiness allows the company to leap-frog a number of the most common bug-bears in the mainland, including distribution and winning customer loyalty in an essentially non-branded product.
Distribution is solved by having the Chinese farmers doing their own transporting, and aiding them by ensuring factories are within easy travelling distance ? in the case of fragile baby chicks, this generally means 150km.
Loyalty is won, as ever, by having a good product. It is equally important to demonstrate effectiveness within a tight 47-day timeframe, the cycle for feeding up a chicken. Good feed equals good chickens, which in turn command a higher price tag. Chinese farmers, say the company, like the fast turnaround and the reliability involved in using CP products.
If there is a weakness in the business, it is that of any operation heavily dependent on raw materials ? vulnerability to fluctuating commodity process. The group took a big hit in 1995 when prices rose in the major components of its chicken feed, corn and soya beans.
The damage from these price hikes is expected to flow through into 1996, squeezing profit margins on the mainland joint ventures to an estimated 10 per cent.
If chicks give CP its mainstream income, then the icing comes from its 'compradore' activities ? the role beloved of Hong Kong conglomerates suchas Wheelock.
The rationale behind linking up with the likes of Honda of Japan and Nynex of the US is simple: the foreign partner provides the technical expertise and CP brings local savviness, connections and an almost unparalleled ability to navigate China bureaucracy.
Motorcycles ? an increasingly competitive sector ? offers an example of the strategy at work. In the mid-1980s, CP's knowledge of the motorbike sector was minimal and it relied on Honda to supply the technology for its Ek Chor China Motorcycle.
Strong demand for motorbikes in China, plus economies of scale, led to fast expanding turnover and profits. By the end of last year, it was churning out 800,000 motorcycles and was in pole position to catch up with the country's leading manufacturer, Jialing Industrial Group.
Unfortunately, the group's recent experience suggests it is less well equipped to make its mark in more competitive marketplaces. Motorcycle stockpiles are mounting and the cost to Ek Chor is severe: ING t3arings forecasts that Ek Chor's share of profits which accrue to the Hong Kong-listed arm, CP Pokphand, will fall from HK$145m (US$18.7m) in 1995 to US$6.1 m in 1996 and to US$4.4m this year.
High debt level
Further evidence of the less successful side of CP's joint venturing is afforded by TelecomAsia, the consortium which won the licence to build and operate some 2.6m fixed telecom lines in Bangkok. After a rapturous initial response from fund managers, TelecomAsia has become a loss-making vehicle with an uncertain future. Talk of a string of subsequent projects has quietened.
Joint ventures have also broken up. CP's flagship retail strategy is heavily dependent upon size: buying up mom-and-pop distributors to ensure it is never short on supply. But what, the critics ask, when the distributors grow tired of being monopoly suppliers to a big foreigw chain and revert to servicing local stores?
Another question mark over the compradore function is time: two decades after China lifted the curtain to foreign investment, is there still the same need to join hands with a guide? ING Barings' Park says there is: "With the larger companies you will see a lessening of this compradore function. But many as the companies are that have established themselves in China, you will see a lot more willing to go in now, and CP does know its way round the myriad of bureaucracy in China ? probably better than anyone else."
The group's guanxi in China is matched by a management style that arguably owes more to the West than to the East. In hiring, professional skills are preferred over relatives, which marks CP out from many of its bigger Hong Kong peers. Moreover, it shuns passive investments where it cannot add value.
Where management is starting to raise eyebrows is in a seemingly scatter-gun approach to new investments. "It is very difficult to read the mind of the chairman," says one analyst, "and he has in recent years, like TelecomAsia, made some investments that are not particularly obvious to the group's investors."
Possibly the biggest concern to investors is the group's debt. Some analysts argue that in addition to the risk inherent in high gearing, the group's capital structure leaves it vulnerable at times like the present, when both the China motorcycle and agribusinesses are suffering.
But what worries investors is unlikely to concern China ? and therefore unlikely to harm the company's long-term performance in that market. As Park points out: "Whoever is in power in China, the problem remains the same ? they have to feed the country. And CP can assist them in maintaining political stability by boosting agribusiness." Enditerm
One of the most popular expatriate eating places in Beijing is the Red Basil Thai restaurant. Although it is close to some of the big hotels, it is not easy to find, being flanked by apartment blocks and almost invisible behind one of the capital's new flyovers, Yet table reservations are necessary at weekends when embassy cars dominate the parking lot.
Red Basil is a Ynlam (US$1.2m) investment, 85 per cent owned by Thailand's M Grand Hotel Co. The remaining share is taken by Beijing's Chaoyang District, where the restaurant is located. M Grand was created in 1994 by M Group Public Company Limited, the conglomerate run by Sondhi Limthongkul. M Group publishes the daily Asia Times and the monthly magazine Asia Inc.
In the hotel business, M Grand is already active in Yunnan, with the Grand , Lijiang Hotel already open and three others planned in the same province. The Grand Lijiang was badly damaged by last year's earthquake, but after extensive repairs the hotel is now back in business.
Since the establishment of diplomatic relations in 1975, ties between China and Thailand have been cordial. Bilateral trade totalled US$3.15bn last year, when Thailand registered its first trade surplus thanks to larger demand for agricultural exports following on from the serious floods in southern and central China. Thailand was the biggest exporter of rice to China in 1996, and it I also sells rubber, coffee, tapioca, shrimps, fish and chemical products.
Thailand's prime minister will visit China in April with a delegation of business people in an attempt to further improve the economic ties. "There are Thai investors in every Chinese province except for Tibet, Ningxia and Qinghai," boasts one embassy spokesman. This has less to do with strength in depth than the wide presence of one individual company ? Charaen Pokphand. One outpost of its national network stretches to Urumqi, where it operates a feed mill.
Most Thai business people dealing with China are overseas Chinese. "We serve a chopstick market," summarises one exporter. "We produce in China and export to Taiwan, Hong Kong and to overseas Chinese in Malaysia, Thailand and Singapore."
They tend to be familiar with both the language and the region. M Grand's manager says it helps being ethnic Chinese but he still finds working in China difficult, citing training and the complicated regulations as the main problems.
Many Thai companies started out and have remained as ethnic Chinese family businesses. One exception is Siam Cement, the biggest Thai construction materials company, which was created in 1913 by King Rama VI who wanted. to break Thailand's dependence on imported cement. Many of the company's managers, however, are overseas Chinese, including Ms Sitthichai Wongthavonkit, general manager of Beijing Cementhai Ceramic (BCC) ? a joint venture with Beijing General Corporation. The company employs 220 staff and is 60 per cent Thai-owned with an initial investment of US$30m. Production of its colourful `Cotto' brand of tiles, for kitchens and bathrooms, is due to start in July this year.
The venture is located in Xisangi, northern Beijing, close to the Great Wall. Sitthichai says that while the site is fine, it is a problem for the employees, most of whom have to travel about one hour. There have also been complaints from staff that BCC does not provide any dormitories for workers at the site.
BCC does not intend to export its ceramic tiles. "I think the market here is big enough," says Sitthichai, adding that "the competition outside is very fierce". Instead, it is aiming at the luxury market in China, bringing it into competition with two Taiwanese joint ventures, ASA (Yaxiya) in Shanghai and Eagle in Foshan (Guangdong). Once BCC is well established, it aims to gain a 30 per cent share of the north and north-eastern China market. Tiles currently made in Thailand and imported into China cost Yn460 (US$55) per square metre. Sitthichai expects to cut production costs by 40 per cent but she is mindful of training requirements and rising labour costs in China.
BCC was Siam Cement's first project in China. It now operates two other joint ventures: a gypsum products plant in Tianjin and a factory for diesel engines for mini-tractors in Neijiang, Sichuan province.
Thais target Sichuan
Thai banks have come in to support such activity ? there was US$288m of utilised Thai investment in China in 1995. Thai Farmers Bank, Bangkok Bank and the Thai Military Bank are all represented in Beijing. Bangkok Bank also has branches in Shantou, Shanghai, Chengdu and Xiamen.
Sichuan is popular among investors, according to the bank's Beijing repre sentative Mr Songchai, because it resembles Thailand, with a lot of agriculture. Xiamen was chosen to support Taiwanese investors. "People from Taiwan cannot get financial supply directly from Taiwan," when investing in China, says Songchai. He estimates that about 25 per cent of Bangkok Bank's clients in China are Thai companies, the rest coming from Hong Kong and Taiwan.
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