TWO former senior employees of UOB Kay Hian Private Limited (UOBKH) were charged on Wednesday for allegedly lying to the Monetary Authority of Singapore (MAS) in relation to reports on a then Catalist aspirant. Lan Kang Ming, 38, and Wee Toon Lee, 34, each face three charges of providing MAS with false information in October 2018 in relation to due diligence reports on an unidentified company applying to list on the Catalist board of the Singapore Exchange. MAS said in a media statement on Wednesday that it was performing an onsite inspection of UOBKH between June and August 2018, to assess the latter's controls, policies and procedures in relation to its role as an issue manager for Initial Public Offering (IPOs). During the examination, Lan and Wee were said to have provided different versions of a due diligence report relating to background checks on a company applying to be listed on the Catalist board of the Singapore Exchange. UOBKH had acted as the issue manager
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Foreign firms are turning their attention to China’s hinterland, but now their mainland partners are not so needy - and tie-ups can easily go sour
Toh Han Shih
14 July 2012
The vast potential market of China’s inland provinces and secondary cities is drawing multinational companies, many of which want to form joint ventures with local firms to enter these consumer markets. But industry players warn that these joint ventures run the same risks that led to the unhappy failures in the past of many multinational partnerships on the mainland.
“When we talk to executives of multinationals, they indicate they want to go to the inner provinces,” and are considering forming joint ventures to crack the local markets by tapping into an established network, said Peter Kung, a senior partner at global accounting firm KPMG. The prospective partner may not be a Chinese firm but an overseas company with local knowledge, he added.
The return of the joint venture is a “major change” in doing business in China, KPMG said in a recent report. “Such arrangements were popular in the 1990s, largely because legal alternatives were limited. However, that changed soon after China’s entry to the World Trade Organisation in 2001, and many foreign companies took advantage of more liberal laws to set up wholly owned enterprises.”
In the past when Chinese law required joint ventures for certain industries, multinationals had to stick with their partners even if they didn’t like them, Kung said. “Now, the situation is different. Multinationals don’t have to be forced into joint ventures, they can choose their partners.”
KPMG China partner Nick Debnam added that “the shift from cheap China to consuming China means firms will be looking to produce less in the country’s factories and sell more to its consumers, a more challenging business model” than making goods for export.
The size of the market in China’s hinterland gives some idea of its allure. According to the KPMG report, China’s inland economies have an annual economic output of US$3.15 trillion. By comparison, that of Latin America and the Caribbean is US$5.6 trillion, and the Middle East and North Africa’s amounts to US$2.77 trillion. For just three categories of luxury goods - wine, chocolate and fresh or chilled fish - mainland China’s imports jumped to more than US$1 billion in 2010 from less than US$100 million in 2000, KPMG said.
“We are focused on the coastal cities for the moment, but there is massive opportunity in the interior cities, especially the second- and third-tier cities,” Christophe Roussel, chief executive of global non-food logistics at British supermarket chain Tesco, who is cited in the KPMG report.
“The global economic crisis has made China’s domestic market more important to us,” added Frank Liao, China general manager of Avery Dennison Retail Branding and Information Solutions, a US footwear and clothing firm, in the same report.
In a separate study, US management consultants Boston Consulting Group (BCG) said the mainland’s middle and affluent class will rise to 400 million consumers in 2020 from 150 million in 2010. Two-thirds of those people will live in small cities.
In 2010, only 18 per cent of consumers in the smaller mainland cities could be classified as belonging to the middle and wealthy classes, but that will rise to 45 per cent by 2020. By then, there will be nearly 800 cities and towns on the mainland with per-capita real disposable income greater than Shanghai today, BCG predicted in its 2010 report.
“We see significant growth opportunities in inland cities, as well as third, fourth and fifth-tier cities,” said Carol Liao, a BCG partner. “Today, if a company wants to reach 80 per cent of the middle and affluent classes in China, they have to be in 310 cities. By 2015, they need to be in more than 500 cities,” she said.
What’s more, multinationals need to quickly establish distribution networks, hire sales representatives, create distributors and set up logistics networks, she added. “Speed is important. Going to lower-tier cities faster will give you the advantage of being in the first or second wave. Your chance to be more established, hire better people and set up sales channels is better.”
Finding partners to help get that first-mover advantage may be hard to find, however. Previously, Chinese companies were more reliant on foreign capital and thus more willing to form joint ventures with multinationals, said Honson To, KPMG’s China partner for transactions and restructuring. “Today, they don’t need money,” and unless the multinational has an attractive brand, he added, “it is difficult to convince a local partner why they should agree to a joint venture”.
And if the multinational manages to get into bed with a partner, that’s where the trouble may begin, given conflicts of culture, management philosophies and investment priorities. Many joint ventures between multinationals and local companies in China have broken up over the past 20 years, said Tim Clissold, author of Mr China, in which he describes his business disputes with Chinese partners. “Generally, a joint venture breaks down due to different expectations for each party and different business objectives which are not properly resolved.”
For example, the Chinese partner may want to use the joint venture to support local government objectives, whereas the foreign party may want to grow the business organically, said Clissold, who is now CEO of Peony Capital, a Beijing-based private equity firm. “Both of these are legitimate business objectives, but they are incompatible,” he added.
“The other thing that can cause a breakdown is Western companies tend to be less flexible to changing business conditions in China,” he said. For instance, foreign firms tend to get upset if a Chinese joint-venture partner tries to bend the contract rules. “This is just a fact of life in China and foreigners need to plan for it.”
The same problems multinationals faced with joint ventures in first-tier mainland cities in the past will confront joint ventures in lower-tier cities now, said Clissold. “I would be a bit more hopeful, because both sides have probably learned from the experience of others, but I am sure there will be many break-ups in this next cycle.”