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Saturday, September 19, 2020

Killing Chinese Brands -- September 19, 2020


 

 

Killing Chinese Brands

 

By LARRY ROMANOFF – September 19, 2020

 





 

It is a matter of urban legend in the West that China has no international brands. With brand warfare being the current rage, so many articles in so many Western media take apparent pleasure in mocking and denigrating China for the apparent inability of Chinese companies to either produce a brand attractive to Westerners or to effectively market it in the West. One article in the Wall Street Journal claimed China could build ipads and high-speed trains, but can't even make its own fancy handbag. There is much truth in the claim that few Chinese brands have escaped their domestic environment to find comfortable residence in Western countries, though the insinuation that this has been due to Chinese shortcomings is not justified. The reasons lie elsewhere, as we will see.

 

 

One seldom-mentioned reason for the absence of Chinese brands on foreign shelves is that American, and especially Jewish-owned, multinational firms have made a science of pre-emptive registrations of brands and trademarks. As one Chinese media source reported,

 

 

"There are so many painful cases of time-honored [Chinese] brands being pre-emptively registered by foreign companies overseas and some enterprises have been unable to get their brand names back."

 

 

Sometimes these registrations are made by individuals hoping to profit by extorting large cash payments later but, far more often, are done by US multinationals to prevent the Chinese brands from ever becoming international competitors. In most cases, the Chinese firms have no idea their brand names and trademarks have been stolen and registered in all Western countries, and learn of the fact only when they begin to expand internationally. When they do learn of it, most are unfamiliar with the procedures of taking legal action against an American company, and most Chinese don't trust American courts to render fair judgment to a Chinese firm against an American company or citizen. Think of Nike and Onitsuka, or of Citibank and the Chinese citizens still trying to recover their gold. A few Japanese firms have done this as well, but the practice appears to be almost entirely American.

 

 

 

When China opened its doors to foreign trade and joined the WTO, the first commandment imposed was that the country be fully open to what is euphemistically termed "foreign investment". To many of us, that might mean an American real estate development firm coming to China to engage in development projects, P&G building a factory in China to sell their soap and shampoo, or Coca-Cola or Pepsi making and marketing their drinks, but that is not what happens and, in the instances where such attempts were made, they have usually failed. Duracell tried for 15 years to establish itself in China, yet succeeded in obtaining a market share of only a few percentage points, China's Nanfu Battery commanding twenty times Duracell's share. Instead, the process takes a very different path. Opening a country to foreign investment means making available for foreign purchase every attractive domestic brand already in existence, with the intent, the process, and the result, most often very different from those we might expect.

 

 

In 2012, Nestle announced a partnership agreement with Chinese candy and pastry producer Hsu Fu Chi to acquire a 60-percent stake in the company, and another deal for 60 percent of Yinlu Foods Group, famous for its canned food and drinks. This was the 35th foreign purchase of a major Chinese brand during the year, insiders claiming Nestle intends to dominate China's candy and pastry market through the purchases, believing the brands will disappear altogether. These fears are not unwarranted. Many domestic brands such as Maxam cosmetics, purchased by S.C. Johnson, Panda Detergent (P&G), Nanfu battery (Gillette), Mini Nurse cosmetics (L'Oreal), were stars in their respective markets until purchased by foreign multinationals. Since the foreign beverage giants Pepsi and Coca-Cola entered China in 1990s, the "big eight" Chinese traditional beverage brands, which included Tianfu cola and Beibingyang (Pepsi), Robust and Zhengguanghe (Danone), have all disappeared from the market. The brutal truth is that selling domestic companies to foreign multinationals seldom yields expansion for Chinese brands, and most often will instead guarantee their demise. Foreign companies like P&G, J&J, Coca-Cola, Pepsi, Nestle and Danone aim only to enlarge the domestic market share of their own brands and, rather than develop local brands, they kill them. In the first twelve months after S. C. Johnson entered its JV with Shanghai's Maxam Cosmetics - the nation's leading brand - Maxam's products had disappeared from the market and its production fell by 98%. Since China opened its doors to foreign companies, the country has seen a long list of venerable and highly popular brands disappear from the market through these predatory takeovers.

 

 

Wang Wei, Chairman of the China Mergers and Acquisitions Association, said the influence of a brand like Hsu Fu Chi is priceless, and it is difficult to estimate the power of the cultural influence obtained by foreign companies when acquiring domestic brands. If treasured domestic brands are not protected against foreign companies during this period of the country's development, China could lose these brands forever, at a distinct financial and cultural loss to the nation - as has already occurred in large measure. Among all domestic firms purchased by foreign ventures, time-honored brands face the biggest challenge. At the beginning of China's restructuring and opening-up, the country had no established norms for evaluating its famous brands, and many of these were sold at low prices to essentially hostile purchasers. The country's new regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors now require that all takeovers of famous brands be subject to special approval.

 

 

Instead of simply placing all attractive domestic brands on the sale table, Chinese officials attempted to protect them through the establishment of joint ventures with foreign corporations that would result in their expansion and growth. Most often, the local brand and IP, plus the manufacturing and distribution facilities would be placed into one of these joint ventures as the Chinese contribution, with an equivalent value of foreign capital and knowhow from the foreign enterprise. The promise (and the hope) were always that these JVs and mergers would accelerate China's industrial development by the promotion and expansion of the nation's many and valuable domestic brands into international markets. In each case, the foreign firm (usually American) would vow to use its resources to promote and enhance the domestic brands put into these JVs by unsuspecting Chinese businesses. The Joint Venture alliances were presented on the basis they would help domestic companies upgrade their design and innovation capability, and remove obstacles preventing these local companies from expanding worldwide.

 

The Americans painted an attractive picture of a solid R&D base, unlimited financing, extensive international marketing and management experience, all of which they promised would be fully brought to bear to the benefit of their Chinese JV partner. But American (and other foreign) multinationals see no value in, and have no use for, other countries' domestic brands. Their business strategies are almost always designed to promote and develop their own brands, the foreign firms simply coveting the sales channels and marketing resources established by domestic brands. Therefore, the plan from the very beginning was to eliminate domestic competition by quickly shelving all popular domestic brands they purchased. The effect in virtually every instance has been that predatory US-based MNCs would simply seek dominance for their own brands, permanently impairing market control by domestic firms and eventually destroying domestic brands rather than developing them.

 

 

One of the most important entry strategies by US and European multinationals when entering consumer markets in developing economies, is to acquire the distribution channels that provide efficient access to the local market. This is very important in China's consumer-goods market, since foreign manufacturers normally find consumer-products distribution to be quite difficult and confusing. The distribution systems are often locally and regionally fragmented, consumers and retail outlets are scattered widely across regions, and tastes may differ substantially by region. China's market fragmentation may be the only thing that saves it, since in most industries it is difficult for even a predatory foreign company to achieve a market share of more than 5% for its own brands by its own efforts. These MNCs therefore turn to purchasing local brands with adequate manufacturing facilities and good distribution systems, then use these to simultaneously remove competitive domestic brands from the market and substitute their own products. Most multinationals, especially those that are US-based, are renowned for this kind of predatory mercantilist capitalism, and US-based capital almost always takes this strategy in China. As one writer stated:

 

 

"The entry of foreign capital into China has been colloquially categorised as "a three step process": (1) buy the Chinese brands and freeze them, quietly removing these local competitors while using their distribution channels and market resources to promote the American brands. (2) Simultaneously, bleed the JV dry by siphoning all the profits to the US parent. Then, (3) purchase the skeleton and bury it."

 

 

For American and Jewish-owned MNCs, the first step is to establish a joint-venture by promising to apply their extensive capital, knowledge, international experience and awesome marketing abilities toward promoting the local brand. The second step is to deliberately skew the JV's accounting, finance and marketing departments to incur significant consecutive annual losses, until the Chinese JV shares are essentially worthless. The third, and final, step is to buy the profitless Chinese shares from the original owner at pennies on the dollar, and shut down the JV. The result is that in only a few years the Chinese brand has disappeared from the market and been replaced by an American brand, usually with the IP of the local brand owned by the US firm, preventing any possibility of a return to the market. Many Chinese brands were swept up in the tide of the new market economy, hoping to draw support from foreign capital, talent, and experience to boost the development of their companies and brands, but the owners and officials were inexperienced and naive, and many of those old brands quickly fell into oblivion after being acquired by the much more clever foreign predators. For those lucky enough to survive, their market shares have shrunk considerably, and the resurrected brands return to the market only to find themselves facing their colonisers who had meanwhile grown much stronger.

 

 

These International (and largely Zionist-owned) companies in particular seek market domination, large market share and profitability being insufficient, with an absolute necessity to kill off any competing domestic brands and completely dominate each segment of a market, the plan being that wherever you are in the world, you will find only American brands. When the Shanghai government forced Johnson Controls to close down their battery plant due to serious lead poisoning in the area population, a news report told us the real problem was that: "the dispute has complicated Johnson Controls' ... aggressive bid to dominate that market." And they must dominate those markets by force, because that is the only means of controlling pricing, forcing adaptation to American "standards", and ensuring huge profits. The standard strategy is to enter an unprotected or less-developed market and use whatever tactics are necessary, including political and economic pressure from the US State Department, to buy up all the best local brands in an industry. Their next act is to close all those factories, not because they aren't popular or profitable, but to kill the brands. They then introduce their own US products into the newly-created void, and the nation's choice now is "American or nothing". Of course, foreign firms employing this strategy in the US market would be subject to immediate and punitive sanctions, and hundreds of new laws would be passed to prevent foreign ownership.

 

 

•The Story of Tianfu Cola

 

 

By the early 1990s, Tianfu Cola was a Chinese icon, one of the largest beverage makers in the world and commanding an 80% share of Chinese cola market and was already being sold in Russia and the US. Tianfu's formula had no resemblance to the sugar-water drinks like Pepsi or Coca-Cola, the company having developed an entirely new cola beverage that contained Chinese medicinal herbs with notable health benefits. Instead of damaging health in the manner of Pepsi or Coke, Tianfu had an extensively-documented history of effective defense against common viruses. It was therefore not only extremely popular but quite healthy as well and, at the time of its ill-fated adventure with Pepsi, the company had 108 bottling plants across the country, well over 1 billion RMB in assets, and was highly profitable.

 

Then in 1994, Tianfu entered into a JV with US-based Pepsi, and in eight years the brand was dead and the company bankrupt. Tianfu put their branded products, their formulas, methods and processes into the JV with an equivalent cash injection from the other side, the contract containing a government stipulation that Tianfu-branded beverages must form no less than 50% of the JV's annual production. Pepsi adhered to this requirement initially, actually increasing the ratio above 50% for two years, then, when government oversight ceased, Pepsi abandoned their legal obligation and in a few years Tianfu beverages fell to only 0.2% of production, Pepsi's brands having completely overtaken the JV and replaced Tianfu in the market.

 

 

The cause of the collapse was not difficult to ascertain. The owner of Tianfu said, "The joint venture runs well every year, but every year it is in loss; the profits are directionally transferred by PepsiCo through expensive purchase of concentrate from its company." So, while Pepsi continued shrinking production of the Tianfu brands, and making huge profits for itself by milking all the cash into its own company, the Tianfu Group was dragged deeply into debt because the venture failed to turn a profit. The key was that Pepsi cleverly transferred the rights to the preparation and distribution of concentrate from the JV into their own hands, and so during the early few years, even though sales of Tianfu were soaring, the JV incurred huge losses because Pepsi drastically increased the cost of the concentrate every year, ensuring the JV could never make a profit. In fact, Pepsi was siphoning into its own pockets much more than the JVs entire profits, with the JV incurring losses as high as 140 million yuan in one year, and cumulative losses of more than 1 billion RMB, all of those funds having been transferred to Pepsi's accounts. The plot was even more clever than I've described. Pepsi had injected a significant amount of cash into the JV, so the first order of the day was to recover that investment. Note the comment above that for the first two or so years of the JV Pepsi increased the production of the Tianfu brand above the stipulated 50%; it fact, it briefly reached about 75% at one stage. Since Pepsi controlled the concentrate and the pricing, the quickest way to 'legally' extract their initial investment from the JV was to hugely increase the production (and revenue, and profits) of Tianfu Cola, but charge an exorbitant price for the concentrate consumed and by that means suck all the cash out of the JV. Once that occurred, the JV had already been bled dry but Pepsi, like Dracula, continued feeding on the dying corpus, while simultaneously replacing Tianfu Cola with Pepsi products in all the channels. The process continued until corpus became cadaver.

 

 

He Qian Huang put a company with over 1 billion in assets and a brand with an 80% market share into a JV with an American firm, and in little more than a handful of years both the firm and the assets had disappeared. Of course, as the JV went further into debt, Pepsi simultaneously increased production of its own brands while cutting back on Tianfu's production until it reached zero and the product had disappeared from the market. Pepsi then shuttered the plants and the original owner sold his shares in the JV to Pepsi for a pittance and walked away from his investment, and that was the end of another iconic Chinese brand. We might reasonably expect an American firm to suffer a huge loss by purchasing a competing brand only to remove it from the market by killing it, but that isn't how it works. Pepsi didn't lose anything by killing Tianfu. Instead, they quickly recovered their original investment many times over, rid themselves of their major competitor, gained significant market share for their Pepsi products and made a 2 billion profit, all from the process of destroying their main competitor. And that is the entire story.

 

 

The deliberate destruction of the brand and the collapse of the company resulted in a protracted lawsuit against Pepsi which, in spite of Pepsi's interminable delays, eventually resulted in victory for the original owner of the brand who won a court order for the return of the Tianfu brand, the recipes and processes. But, in spite of the court orders to cease all brand usage, Pepsi refused, claiming the necessity of yet another court order to compel their obedience. Nevertheless, the original owner has repossessed his main asset of more than 20 years prior and Tianfu Cola has resumed production. The problem of course, as in all these cases, is that the consumer landscape has changed enormously in the interim. In Tianfu's case, the younger generations have no knowledge of the product, and the cola market has in the interim been taken over and dominated by Pepsi and Coca-Cola. To become re-established in a market after a 20-year absence is clearly neither easy nor inexpensive. As one Chinese columnist noted, "This case has been depicted as being symbolic of the struggle of some domestic businesses as they attempt to maintain their market share after aggressive, and potentially ruinous, joint ventures." For their part, as in all such cases with American firms, Pepsi were not only arrogant and unrepentant, but infuriatingly dishonest: "We have not only absorbed and hired more than a thousand local employees, but also provided various extra financial support to both the joint venture and the local partners".

 

 

Tianfu Cola was neither the first nor only treasured and highly-successful Chinese brand that Pepsi killed. This US-based firm pulled almost precisely the same stunt on a long list of Chinese beverages, all of which were seen as potential competitors to Pepsi and therefore suffered the same demise. Pepsi was widely criticised for a similar situation, at about the same time, with Beibingyang (Arctic Ocean), a leading Chinese soft drink company with its white bear logo that had been dominant in China for 40 years and which produced a range of flavored soft drinks and bottled water. Pepsi entered into a similar JV with Beibingyang, and within five years the brand was dead, the factories closed, and the JV bankrupt. As with Tianfu Cola, Pepsi made legal undertakings to government authorities to develop and bring new vigor to the company's brands, but they clearly had the opposite intent. In fact, in this case, Pepsi established four separate JVs, each relating to one of the company's branded products, with a clear intention to kill each one. As with Tianfu, the original owners have won legal battles to repossess their brands and have reintroduced their products to the market. And, as with Tianfu, this is now an uphill battle with the product having been absent from the marketplace for so many years and now having to compete with well-established foreign brands. Nevertheless Beibingyang is back on the shelves with hundreds of distributors and tens of thousands of outlets, and will hopefully recover its prior market position.

 

 

And it isn't only soft drinks. Consumers in China will have noticed that so many supermarkets, convenience stores and other shops seem to have removed almost all domestic brands of packaged potato chips and similar snacks and are now flooded with only Lay's brand. That's Pepsi's executives at work again, desperately looking for ways to increase profits and satisfy their owners who are unhappy with its loss of market share in the US. Pepsi's executives are distressed that unhealthy per capita potato chip consumption in China is only one small bag per month compared with 15 bags in the US, and that Chinese buy an unhealthy beverage like Pepsi only about 200 times per year, while the average American buys 1,500. Company executives claim China will be the largest consumer market and Pepsi means to be the largest food and beverage company in China, dominating the Chinese market - even if it has to destroy every Chinese brand to do this. According to Pepsi executives, this demonstrates their "commitment" to China. I hold the fond hope that Chinese consumers will recognise Pepsi and its executives as they are and, rather than helping Pepsi fulfill their dream of dominating the Chinese market, will accord Pepsi the same fate it dealt to so many treasured Chinese brands - by refusing to purchase any Pepsi products. We should all hope that day comes.

 

 

The Pepsi-Tianfu case is only the tip of the iceberg, in terms of business deals between foreign and Chinese companies that have gone wrong. Analysts point to litigation in industries ranging from beverages and chemicals, to automobiles and pharmaceuticals. A partner in a Beijing law firm said

 

"The '80s and '90s were rife with such cases, based on foreign companies slobbering at the Chinese market potential, and local companies being hungry for capital. In these decades, local brands fell behind in terms of technology upgrades and sales, driving them into the arms of foreign companies only too willing to set a foot into China. However ... local brands were marginalized or forced out of business."

 

An article in the Global Times reported that He Weiwen, a professor with the University of International Business and Economics, said these alliances were not always negative and could sometimes help Chinese companies enhance their abilities and expand worldwide. Perhaps, but I am unaware of any situations where that actually occurred.

 

 

And the Economist Magazine, by no means renowned for either intelligence or impartiality, wrote an especially uninformed article claiming China's soft drinks companies were no match for foreign competition. The Economist specifically referenced the famous Jianlibao Group's brands, noting they were among the best-known in China, but which are, "in the face of foreign competition from the likes of Coca-Cola and PepsiCo ... teetering on the brink of ruin." Our child writers at the Economist were lamenting the fact that after Jianlibao had been driven into debt and seen its market share plummet from its experience in a foreign JV, the company was rescued by a Chinese state-owned firm to ensure its survival. The Economist went so far as to claim that "As one of the less protected Chinese industries, the soft-drinks sector has had long experience of what life might be like under WTO rules. Jianlibao's misfortunes have shown the perils of trying to compete head on with multinational giants ...." But this is dishonest reporting. Jianlibao's misfortunes have shown the perils of trusting foreign companies in JVs, as Tianfu, Beibingyang and so many dozens of others have discovered, and this illuminates the real but hidden intent behind WTO "rules".

 

 

•Mini-Nurse

 

 

A few years ago, L’Oréal came to China with a new low-end brand of cosmetics and skin care products named Garnier, intended in large part to convert 300 million young Chinese men into perfume sachets. In addition to a vast, expensive (and foolish) marketing campaign, L’Oréal needed two other things: manufacturing facilities and a distribution system. Mini-Nurse had both. At the time of its purchase in 2003, Mini Nurse was one of the top three skincare brands in China, a beloved domestic mass-market brand, with a major market share and an enviable reputation for the quality and affordability of its products. In addition to its enormous customer base, Mini-nurse had extensive manufacturing facilities and what was perhaps the largest distribution system in the country, with its products in more than 280,000 outlets throughout China, and was on the verge of taking its brand into international markets. The great advantage to L’Oréal was the powerful distribution channel, since the company would have needed decades to build a channel of that depth on their own. And of course, the ready-made manufacturing facilities that could be converted to L’Oréal’s Garnier brand. At the time of the acquisition, L’Oréal executives said, "We think it's a great asset for us to develop the Chinese market, as Chinese consumers love the brand. Mini-Nurse can reach the consumers that other brands can't reach. Mini-Nurse complements L’Oréal’s brand portfolio perfectly and enables us to move more quickly into the Chinese consumer skincare market." But L’Oréal had no sooner completed the purchase than Mini-Nurse began evaporating from the market, pushed to the side in both manufacturing and marketing, to make way for Garnier. Today, Mini-Nurse has almost entirely disappeared from the Chinese market, never to reappear since one of the clever conditions of the sale was that the creator of the brand could not engage in the skincare business in the future.

 

 

Many industry insiders and perhaps most Chinese customers question L’Oréal's real purpose in the acquisition, the weight of evidence being that Mini-Nurse was purchased only as a platform for the launch of L’Oréal's Garnier brand and was disposable, all indications being that L’Oréal simply wanted to establish its low-end Garnier before killing off its competition. L’Oréal denied plans to kill the brand, but the facts tell a different story. After a huge public outcry, company executives made sporadic weak efforts to promote the brand, and it's possible that government pressure to maintain the brand may be keeping it alive, but Mini-Nurse is now like a zombie, neither alive nor dead. The consensus is L’Oréal will maintain this status for a short time, then blame poor sales for its eventual demise. L’Oréal has declined to disclose details of its plans. "We're not ready today to talk about Mini-Nurse. It's not an easy topic, it's challenging. But one thing we're sure of is that we didn't buy Mini-Nurse with the intention of taking it out of the Chinese market.” Nevertheless, that was the result, the irony being that L’Oréal's Garnier brand experienced a well-deserved premature death, leaving that portion of the skincare landscape bare, and yet another treasured Chinese brand gone forever after suffering a foreign acquisition. I should note here that the comments above by a L’Oréal executive were dissembling nonsense; Mini-Nurse was thriving, profitable, and growing rapidly until L’Oréal stuck their fingers into it, so why would it today be 'difficult and challenging'?

 

 

•Shanghai Jahwa

 

 

Maxam was an international cosmetics brand that was born in Shanghai in the early 1960s, and by the late 1980s was China's leading cosmetics brand with a market share of more than 20%, excellent management, was a financial powerhouse and was extremely innovative in both product development and marketing. The company produced China's first hairspray for Chinese women, the first sunblock cream for Chinese skin, the country's pre-eminent hand lotion, opened the nation's first beauty schools and salons, and introduced specialist consultations in cosmetics marketing. Once again, Shanghai Maxam was headed for a prominent position in international markets.

 

 

Then, yet another American-engineered disaster. In 1990, the Shanghai City government, eager to attract "foreign investment", pushed Shanghai Jahwa into a JV with US-based S. C. Johnson, into which Jahwa contributed two-thirds of the company's fixed assets as well as its Ruby and Maxam brands and most of the company's top employees. But, as we would expect, within three years, sales plummeted by about 98% from over 300 million to less than 6 million and the Maxam brands evaporated from the stores seemingly overnight. After protracted recriminations, the Shanghai government forced a divestiture of Jahwa from S. C. Johnson (at a price of about 500 million RMB) and brought the brand back into the market. But by then it was four years later and Maxam had lost its place in the market and would re-emerge in a new environment flooded with new foreign brand names. Shanghai has since placed Jahwa and its Maxam and other cosmetics brands as a separate corporate entity, with only domestic Chinese shareholders.

 

 

The placement of Shanghai Jahwa onto the market was an event that generated a great deal of interest, primarily from foreign wolves who smelled fresh prey but the Shanghai government set several restrictions on the sale of Jahwa, including the elimination of foreign bankers and hedge funds, the main one being that only domestic Chinese purchasers would be considered for any part of the shareholding. Another was a matter of resources, the Shanghai government stipulating any major purchaser required assets of at least 50 billion RMB. A Jahwa executive stated that "The company that would like to acquire Jahwa the most is Procter & Gamble Co. But we will never give our company to [those *****]." He also noted that Temasek Holdings, the Singapore government's investment company that had already proven its character in China, was also drooling over Jahwa but, after relating the terms of a sale, "we didn't hear further from them". Maxam is fortunate to have had the Shanghai government as their original owner, with the resources to protect and resurrect the company, and the brand has returned to the market and the awareness of Chinese consumers with high expectations for its resurgence. As well, Maxam has been a great success internationally, especially in Europe where it is a well-recognised premium cosmetics brand carried in thousands of retail outlets. Jahwa has also forged alliances with international firms to assist in market expansion. The company's successful launch of its Herborist brand of cosmetics was one such success and it brought back its famous Shanghai VIVE into the high-end makeup market in China.

 

 

It was interesting to read an article in the Financial Times by Louise Lucas and Patti Waldmeir, so typically vacuous, painting an ideologically-blind American picture praising the blessings of free-market capitalism, writing that the sale was "paving the way for one of China’s top cosmetics manufacturers to compete more commercially", adding that "Domestic groups have fallen behind on their home turf [and that] just one of the top 10 skincare companies is Chinese." These two ladies neglected to mention that the reason 'just one of the top companies is Chinese' is that China had too many companies like L'Oreal and S. C. Johnson who bought and killed all the prominent Chinese brands. They did mention that Jahwa entered an "ill-conceived" JV with Johnson, but forgot to point out that the "ill-conceived" part of that JV consisted in placing trust in Americans since, instead of "competing more commercially", Jahwa was instead driven out of the market by the same private ownership they praise. They also managed to locate a Chinese expert, in this case, Zhang Weijiong, Vice President of China Europe International Business School, to agree that "State-owned enterprises are always at a disadvantage when they're competing with top global companies in terms of their systems and platforms. After the reform, Jahwa is on the same platform as everyone else." Zhang should be ashamed of himself because his comments are nonsense masquerading as philosophy, ignoring the fact that Shanghai Jahwa reached a zenith precisely while being a state-owned company and incurred misery only when being turned over to private enterprise.

 

 

As a final point, I was interested to note that immediately upon the announcement that the Shanghai government would refuse to sell Jahwa to an American or other foreign firm, the vultures immediately shorted Jahwa's stock on the market, driving down the share price by the maximum daily limits, as a way of punishing that decision by reducing the value of the company and therefore the proceeds from a domestic sale. I must say I was proud of the response by Ge Wenyao, the company's chairman, who said the sale would be priced on the company's actual value, and not based on an artificial share price caused by the actions of stock-market vultures.

 

 

•P&G and Panda Detergent

 

 

Panda detergent was a household name renowned for its product quality and had by far the largest market share in China until its JV acquisition by P&G, whose first act was to immediately raise the retail shelf price by 50%, effectively killing Panda's sales to make room for P&G's own brands of Tide and Ariel. P&G formed JVs with Li Kai-Shing's Hutchison Whampoa and a Guangzhou company that owned the leading laundry and cleaning factory in southern China, in total killing many Chinese brands, the stories being sufficient for a book I may write. Panda's original owner managed to re-purchase the brand and place it back in the market, but faces the same difficulties of all such resurrected products.

 

 

Gillette Purchases Nanfu Battery

 

 

Fujian Nanfu Battery was one of the five largest manufacturers of alkaline batteries in the world, an industry leader in China, and had for years been China's top-selling brand with a dominant position accounting for about 60% of the domestic market and with revenues approaching 1 billion RMB. The company had assets in the billions of RMB, several hundred thousand square meters of manufacturing facilities, and was at the leading edge of battery research, with a post-doctoral R&D center that had developed many new technological innovations with corresponding achievements. As well, Nanfu was already in fourth place globally, and growing rapidly in the international market. The company's Excell brand had been registered in more than 50 countries and its products were widely on sale in more than 60 countries including the US, Japan and all of Europe, with major plans already in place for further international expansion. Nanfu was so popular in China its foreign rivals Duracell and Energizer were never able to obtain more than a minuscule share of the market, Gillette's Duracell having a share less than a tenth that of Nanfu, and Energizer far behind Duracell, both companies having struggled for years without success.

 

 

Then, another American disaster, this one perhaps more nefarious than most, and certainly one that was bitterly resented. In 1999, the government of Nanping City in Fujian pushed Nanfu into a foreign Joint Venture which the company neither wanted nor needed, with investment funds coming from Morgan Stanley in the US, the Netherlands government and the Singapore state fund. Company executives strongly protested the JV from the very beginning, stating for one thing that Nanfu had a huge cash surplus and absolutely no need of external funds but, even more, protested the presence of Morgan Stanley in the affair, stating from their prior experiences that Morgan was only a wolf and that none of its joint ventures had ever ended well for the victims. Nevertheless, the JV was pushed through, company executives being assured that 51% of the shareholdings would remain in Chinese hands and only 49% released to the foreigners.

 

 

It is a bit difficult to ascertain the original intent of all the participants in this corporate travesty. It is possible Morgan's first thought was to slash costs to make the company appear even yet more highly profitable, then take the firm public and profit hugely from the IPO. However, it seems a definite effort was made to kill Nanfu, the firm quickly having been depleted of its cash reserves and run into a huge loss, results variously attributed to 'bad management' but that is clearly not possible. It's almost a certainty Nanfu was simply bled of its cash by its new "foreign investors". In response to the company's financial crisis, the shareholdings were altered, additional shares were issued, and the foreign ownership portion suddenly exceeded the supposed 'safety margin' of 49% and diluted the Chinese holding to about 30%. In the interim, it was becoming apparent that Duracell in China - and perhaps in all of Asia - was a dead duck, and that Nanfu was likely to soon unseat Duracell from its number one position internationally. At this point, Gillette, the owner of Duracell, was discovered to have been surreptitiously nosing around Nanfu's foreign shareholders, exerting pressure to acquire their shares, an effort that was eventually successful, with Gillette acquiring about 70% of Nanfu, though at huge cost, with Morgan selling out their two year-old $42 million investment at a $58 million profit. All of that process appeared to have been done under the table, with the result being a complete surprise and a devastating blow to the company. My guess is the shareholding redistribution was conducted in anticipation of this event since Gillette's purchase offer produced a higher profit than an IPO might have done.

 

 

The result of the sale was that Gillette immediately shut down all of Nanfu's export production facilities, in one swoop removing Nanfu from world markets and therefore eliminating Duracell's largest international competitor. Gillette could not kill Nanfu in China because Duracell had no hope of obtaining market share and too many other domestic competitors would simply have filled the void. This case was seen as so dishonest and underhanded, and so damaging to China, that several universities conducted studies to determine the precise chain of events and the real intent of the participants. At the time, most of Nanfu's management and a great many of the staff resigned immediately. At the time of the merger, industry insiders openly questioned whether there were a hidden reason for Gillette's stealthy acquisition of Nanfu, having already concluded their plan all along was to kill the Chinese brand. Gillette denied the claim, but not long after the takeover, Gillette forced Nanfu Battery to exit from all overseas markets. After that, half of its production lines stood idle and the company was clearly destined for the dustbin of corporate history. P & G purchased Gillette little over a year after its acquisition of Nanfu, so the decision to kill Nanfu battery internationally may well have been a P & G decision. It is not clear if the Nanping officials who permitted this little corporate atrocity (that appeared to have been led by Morgan) were corrupt or simply gullible, naive and outplayed, though it appears to me Nanfu's destruction was planned from the outset, considering the nature and character of the players and the apparently clever shareholding arrangements. All three foreign investors are known predators and I suspect neither Singapore's state fund nor Morgan Stanley have a welcome carpet in China. In any case, Nanfu and its batteries are gone from the world, one more reason for Americans to boast that China has no international brands.

 

 

The Western media and virtually every Western journalist will deny that American or other foreign companies would kill a brand. Some people, even some Chinese who worked for Pepsi, P&G and other such firms, invent any number naive and vacuous excuses to explain the phenomenon of the total disappearance of perhaps 700 of China's best brands. They claim some of the events - like Maxam cosmetics experiencing a sudden 98% drop in sales - were just 'bad luck', and that others - like the disappearance of Nanfu battery - were attributable to 'bad management'. In other cases - like Tianfu Cola and Mini-Nurse - their view is that the American or other JV partner "maybe didn't pay enough attention" to the Chinese product. To these individuals, my response is this: If one house burns down on a street, that's bad luck. If two houses burn down on the same street, that's unfortunate. If three houses burn down on the same street, that's coincidence. But if more than 700 houses burn down on the same street, that's a plan.

 

 

I have here described the few successes emerging from this American onslaught of corporate homicides in China. I call them successes in spite of their tragic experience in dealing with American firms, since at least a few of these were able to regain control of the brand name and processes and could hold hope of a market resurgence. I have not listed the many hundreds of fine companies and brands that were killed and remained dead. In most cases, these were large companies with long histories, well-established brands and a large if not commanding market share, in every case disappearing from the market after a few years inside an American Joint Venture. The products included China's best and largest electric motor manufacturing company, the heavy farm equipment manufacturer Jiamusi Combine Harvester, which had a 95% market share until entering a JV with US-based John Deere, after which it quickly disappeared. The list includes famous alcoholic beverages, venerated tea brands, bottled waters, all with a prior regional market share of 80% or more, and all of which disappeared within a few years of entering a JV with an American firm. Most of China's famous cosmetics brands, personal care products like toothpaste and shampoo, and so many other categories of once-famous brands and products all suffered the same fate.

 

 

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Larry Romanoff is a retired management consultant and businessman. He has held senior executive positions in international consulting firms, and owned an international import-export business. He has been a visiting professor at Shanghai's Fudan University, presenting case studies in international affairs to senior EMBA classes. Mr. Romanoff lives in Shanghai and is currently writing a series of ten books generally related to China and the West. He can be contacted at: 2186604556@qq.com

 

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Larry Romanoff is one of the contributing authors to Cynthia McKinney's new COVID-19 anthology ''When China Sneezes''.

 







Copyright © 
Larry RomanoffMoon of Shanghai
, 2020