Foreign companies ready to fly solo
Updated: 2011-07-01 10:41
By Meng Jing (China Daily European Weekly)
Customers sit outside a Starbucks coffee shop in Shanghai. The US company announced in early June that it will acquire full ownership of all its stores in key Chinese provinces from its long-time joint partner Maxim's Caterers Ltd. Kevin Lee / Bloomberg
Decades ago, foreign investors in China wracked their brains over an important question: Do I find a local partner or not?
But over the past few years, as many foreign companies establish themselves in China with the help of Chinese partners, the question has evolved. Instead of debating whether or not to find a local partner, firms are now asking themselves: Should I fly solo?
The answer seems to be an overwhelming "yes".
Take, for instance, Seattle-based Starbucks Coffee Co. The coffee giant has taken a firm stance on this question with its announcement in early June that it will acquire full ownership of all its stores in key Chinese provinces from its long-time joint partner, Maxim's Caterers Ltd, Hong Kong's largest food and drink corporation.
Starbucks said in a news release that the agreement would allow it to boost profitability in China through direct control of its stores in Chongqing municipality and five provinces, including Guangdong and Sichuan.
As a result, Starbucks now will have control of more than half of its Starbucks stores in China.
"Full ownership of our stores in central, southern and western China is part of our broader strategy to build China as our second home market outside of the United States," said John Culver, president of Starbucks Coffee International.
Experts say gaining more control over its stores in China will help Starbucks achieve its goal of 1,500 stores across the country by 2015.
"By operating alone, Starbucks should be able to have more control over its brand, which will help the company better manage its staff and improve service," says Xiao Yujia, an analyst of catering businesses with CIC industry research center, a Shenzhen-based consulting company.
"Starbucks will have the final say in its strategic expansion," Xiao says. "The huge market potential has attracted many foreign companies or joint ventures to seek more control in China. Smart investors know that the market has many advantages that other markets don't have."
Starbucks isn't alone in its desire to have autonomous control of its brand. An increasing number of foreign companies have been splitting up with their Chinese partners to seek more control as the world's second-largest economy grows.
Burberry Group PLC, the United Kingdom's largest luxury retailer, had announced a plan to take control of its franchised stores in China for 70 million pounds (79 million euros), a transaction that may boost earnings by almost 10 percent. Its acquisition of 50 stores and related assets from franchise partner Kwok Hang Holdings Ltd will add as much as 20 million pounds to operating profits through March 2012, the London-based company said in July of last year.
The latest financial report from Burberry shows that the retailer has made the right move. The company reported a 30 percent sales increase in China from July 2010 to March 2011.
"The integration of the Chinese business is what's driving greater performance," said Stacey Cartwright, Burberry's chief financial officer.
"We are pushing replenishment into stores, which is fuelling sales growth," Cartwright told the Financial Times in April.
Coach, the New York-based high-end fashion brand, also completed an acquisition of its retail businesses in China from Hong Kong distributor ImagineX Group in April 2009, aiming to build China into its third-largest market worldwide, after the US and Japan.
"It's definitely a trend that foreign companies operating in China want to split with their Chinese joint venture partners," says James Roy, senior analyst with Shanghai-based China Market Research Group.
"Recently we've seen Starbucks and Burberry in the retail sphere - but also John Deere, which makes heavy machinery - decouple from their Chinese partners. The issues are usually about getting more control, not only of their brands in China but also a greater share of profits," Roy says.
He adds that dissatisfied foreign companies will continue to seek splitting from their joint venture partners in the future across all sectors.
But another trend is that more foreign investors are operating as wholly owned entities in China. Seventy-seven percent of the foreign direct investment in China from January to May was made by wholly foreign owned enterprises, compared with 45 percent in 2000.
Lu Jinyong, director of the China Research Center for Foreign Direct Investment at the University of International Business and Economics, says the divorces between foreign investors and their local business partners have become common in transnational investments.
"Once (foreign companies) become familiar with the market and establish its own network, cooperation with a partner is no longer necessary," says Lu, who adds that tensions and conflicts could have emerged in some joint ventures.
In the first 25 years since China's opening-up, foreign investors have preferred to choose local partners to establish their businesses in China.
With the development of a market economy in China, however, more foreign companies have chosen to expand their businesses on their own, Lu says.
"The number of newly founded wholly foreign owned enterprises (WFOE) has far surpassed the number of joint ventures. WFOE have become the major way to attract foreign investments in China," he says.
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