As I left London yesterday morning to the sound of multiple explosions, I happened to read an International Herald Tribune article that provides a cautionary tale regarding the evolution of Chinese companies. The article covered the current crisis of Moulin Global Eye Care, a company that had evolved from a small workshop founded in Hong Kong in 1960 to make spectacle frames and sunglasses into the third biggest manufacturer of eyewear in the world.
The rise and fall of a hot company
Moulin was a hot company. It went public in 1993 and its market capitalization has increased by a factor of nine since its listing on the Hong Kong exchange. As the article recounts:
In the mid-1990’s, Moulin embarked on a rapid series of acquisitions in Europe to build its distribution network. Under a second generation of management, the company tried to make the leap from being a low-cost Chinese supplier of licensed brands to designing, making, distributing and retailing its own products worldwide.
Working in partnership with Golden Gate Capital, a private equity firm in the U.S., Moulin recently paid $250 million to acquire a controlling interest in Eye Care Centers of America, a 378 store U.S. retail chain.
Well, things are now unraveling at a rapid pace. In mid-April, the company asked the Hong Kong exchange to suspend trading of its shares. The IHT article indicates that shortly afterwards
. . . banks had called in debts of . . .$300 million, and liquidators were sent in. [Cary] Ma [chief executive of Moulin] and his father, Ma Bo Kee, the company’s founder and chairman, were arrested as the police began a fraud investigation. The speed of Moulin’s collapse has stunned investors.
Some broader lessons
Now, I certainly don’t know whether there was fraud, but I believe this story offers a broader message. Many Chinese companies are tempted to emulate Western companies. They want to diversify beyond specialized manufacturing activities and develop brands of their own. This is likely to be a mistake. It may undermine the deep advantage that is driving the success of these Chinese companies.
Chinese companies have deeply specialized. In many cases, they are focused on what I call infrastructure management businesses – high volume, routine processing activities, like contract manufacturing or operating logistics networks. They have aggressively built capabilities in these businesses and possess a distinct advantage over many Western companies that were more diversified.
Through its acquisitions over the past decade, Moulin tried to simultaneously enter two other businesses – product innovation and commercialization (design and branding of eyewear) and customer relationship businesses (retailing). These are very different kinds of businesses and inevitably represent a loss of focus (no pun intended).
Moulin would have been much better advised to focus on aggressive growth as an infrastructure management business. These businesses have the potential to become very large and profitable, especially if Chinese companies continue to focus on accelerating capability building. The success of many Chinese companies to date has come from much tighter focus. Rather than emulating Western companies, these Chinese companies should recognize that their success hinges on challenging the traditional model of Western companies. They depart from that path at their peril.
Contrast with Lenovo and Haier
It is useful also to distinguish Moulin’s expansion from the recent acquisition by Lenovo of IBM’s personal computer business and Haier’s recent bid for Maytag. These latter Chinese companies that have been primarily focused on serving the domestic Chinese market, unlike the highly specialized offshoring service providers that focus on global markets. These companies are already playing across the three business types mentioned above – in this respect, they look like more diversified Western companies. They have one big difference with their Western counter-parts. Their close relationship with the Chinese government gives them access to virtually zero cost capital through the country’s state-owned banks, earning them the title of “aberrant buyers”, to use the term employed in a recent Financial Times article (subscription required).
These buyers are likely to run into a different sort of trouble as they go on the prowl for Western assets, especially Western brands. Cheap capital creates the risk of overpaying for assets, especially for product brands, at a time when product brands are actually diminishing in economic value. Many of these companies are fleeing shrinking margins in the domestic Chinese market, but the challenge of integrating and strengthening weak performers in global markets may distract them from effectively addressing the growing challenges of their domestic market.
Like their Western counterparts, these Chinese companies would be better advised to unbundle and specialize in one of three business types – infrastructure management businesses (contract manufacturing), product innovation and commercialization businesses or customer relationship businesses. Trying to straddle all three businesses will only lead to trouble - especially if they have access to cheap capital that diminishes their sense of urgency about the difficult choices ahead.
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