The attacks were also a heavy blow to Mumbai’s ambition to become an international financial center. Many foreign investors closed their offices there, realizing that India has many problems. As a country with many races and religions, India has never developed a cohesive value which is essential to guarantee a consolidated nation. Consequently, the nation is always in the state of split. From time to time, clashes and conflicts erupt, especially between the Hindu majority and the 140-million-people Muslim community.

The terrorist attacks coming along with the global financial meltdown were already inflicting heavy losses on India, especially on its pillar industry, the outsourcing service sector. In the first half of 2007, India’s outsourcing service suppliers signed on for 48 projects for a total of above USD5.5 billion. In the first half of this year, however, they only secured eight similar contracts for a total of a mere USD767 million. Analysts at Forrester predict that US financial service companies are likely to cut IT investments in India by 15%-20% next year.

Indian firefighters are putting out the fire on Taj Mahal Hotel caused by terrorist attacks on November 27th.

Despite numerous problems, the occasionally turbulent India remains a global focus as the only country that can match China in terms of development speed. In the past three years, India’s annual GDP growth rate has remained above 9%. Although the rate may drop to 7% this year, the overall growth is still remarkable.

China also has many problems at the moment. This year, its GDP growth rate will slip below 10%, and probably to 8% next year. This year’s early journey home for tens of millions of migrant workers ahead of the annual Spring Festival is a disturbing sign that major economic trouble is looming in China’s manufacturing industry.

The two countries have ascended the economic ladder by specializing in specific sectors of the global economy. Both nations have benefited immensely by embracing the surging relocation of the world’s manufacturing and service industries respectively. For a long time, business has been good. But that is changing rapidly.

Amid the global economic chaos, the financial crisis is certain to hammer GDP growth drastically across Europe and North America. China and India will remain the only two big economic powerhouses to maintain at least 7% GDP growth. However, the two countries are no longer content with the positioning that has been imposed on them till now. Instead, they are accelerating their presence in each other’s dominant areas to become more versatile global contractors.

For instance, China is vigorously developing its outsourcing service industry. Dalian, a coastal city in the northeast of China, has even laid out an ambitious target to become a global outsourcing center. Meanwhile, India is quickly becoming proficient in high-end manufacturing. At present it has already gained an edge in the auto and pharmaceutical industries. Both the dragon and the elephant aim to become a two-in-one supplier rather than specialists in only one field.

A growing competition has just kicked off between China and India, but it will escalate as the financial crisis deepens, which might not be a bad thing. “The competition between China and India will invite more multinational companies into the two countries. In this way, local companies in the two countries will have more opportunities to copy the successful models of international players,” observed Liu Jiren, Chairman and CEO of Neusoft, at a recent business forum. “Of course, we have also learned much from our Indian counterparts.”

Chinese companies, meanwhile, could learn about globalization strategy from Indian companies. Tata Consultancy Services (TCS), India’s largest outsourcing service supplier, has recently acquired all the offshore Business Process Outsourcing (BPO) operations of Citigroup in India - much to the envy of some Chinese outsourcing service suppliers. Currently, TCS has four global delivery centers in China, which are committed to the Asia-Pacific markets. In fact, the largest bank in China has contracted out some of its IT systems to TCS. Revenues from the US market now account for less than 50% of TCS’s total.

Indian manufacturers also have a relentless determination to expand globally. Last March, Tata Motors Limited acquired Jaguar and Land Rover from Ford Motor Company for USD2.3 billion. Tata is also eyeing GM’s Hummer brand.

When the global steelmaking industry was flourishing, a large Chinese steel maker planned to acquire European steel giant Arcelor, but was brushed aside by Indian giant Mittal due to hesitation. Many Chinese companies that have acquired foreign companies in the hopes of improving their global operations remain mired in mediocrity. Unlike Tata and other Indian companies, many Chinese companies are still struggling with global expansion.

In October, with 25,025 vehicles sold, Guangzhou Honda was ranked 6th for auto sales in China, behind FAW Volkswagen, Shanghai General Motors,  Shanghai Volkswagen, Dongfeng Nissan and FAW Toyota. More than 13,000 Honda Accords had been sold, beating out the formidable Toyota Camry in the mid to high-end market.

In fact, Guangzhou Honda has just four vehicle models: Accord, Odyssey, City and Fit. But it remains confident about introducing new models despite the global economic downturn. In fact, its sales continue to climb. “Guangzhou Honda does not need many models to expand sales. But we require each model to remain among the top three in their respective segments,” explains Eiji Okawara, the president of Guangzhou Honda.

Zeng Qinghong, the former executive vice president of Guangzhou Honda and current president of Guangzhou Automobile Industry Group, has a keen understanding of the strategy needed to survive in an industry that is on the ropes. “Be discreet and be economical before expanding,” he notes.

Getting Lean and Flexible

Toyota has its own pattern, and so does Nissan. Guangzhou Honda builds its “flexible lean production model” in China on the principle of “being discreet”.

Guangzhou Honda’s production procedures are similar to other auto brands: punching, welding, coating and assembly. But there is one big difference that sets it apart from other auto makers: Guangzhou Honda’s production line can crank out four different models at the same time. “It is the only one in the world,” boasts Eiji Okawara.

“Be discreet” has always been the principle of Guangzhou Honda.

The system now involves two production lines. Every six vehicles on the line are of the same model. Another mould is then installed to build another model or for painting the vehicles in a different color. The changeover requires only 50 seconds.

It might seem that the 50 seconds is a needless waste of time. But for Guangzhou Honda, maintaining steady development is a bigger priority than using that same time to just build another car. Zeng Qinghong describes the production pattern as a system that allows “multiple models to share the same production line, with the model mix flexibly adjusted to meet market demands”.

The pattern also minimizes overall costs. While it may seem more efficient to build a single model on one line, in the always-changing auto market, a stubborn pursuit of numbers and reduced unit costs can often result in overproduction, a nagging problem for any automaker. In addition, a production line requires massive investment, which means it will take a considerable period of time to recover the costs while grappling with the higher risks and dropping profit margins that currently plague the industry.

“I cannot deny that cranking out a single model on one production line is favorable in the effort to minimize costs, but to survive, the business needs an optimal efficiency model. And the answer is a flexible, lean production model,” explains Fu Shoujie, the chairman of Guangzhou Honda. Between absolute benefits and real benefits, Guangzhou Honda has chosen an optimal route: a production model based on careful product research and precise estimations of the market segments.

The Fit saloon was introduced by Guangzhou Honda under specific market conditions. The first Fit rolled off the line in 2003 at a time when international automakers were vying for a share of the growing family sedan market in China.

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Before the Fit had been introduced, the Gallup Organization, Research International China and some other well-known research companies had carried out extensive market analysis. These research groups collected several models that targeted a particular consumer group. All logos and identification were removed from each model so the brands would not influence the selections of the surveyed consumers. Fit turned out to win with a 70% selection rate. With its outstanding fuel economy and stylish design, Fit has proven to be a bestseller among A-grade hatchback cars.

Guangzhou Honda’s production strategy also includes the ability to predict the market growth rate. All four of its models ought to be able to respond to changes in the overall consumer market. So, based on estimates of growth or contraction in a particular segment, the production rhythm will be adjusted accordingly.

For instance, after meticulous market research, it was estimated that the multi-purpose vehicle (MPV) market would soon see a downturn. As a result, the Japanese company has planned to cut the output of the Odyssey minivan in the next season. Under the flexible production process, Guangzhou Honda will probably be able to give up its previous production procedure of manufacturing three cars of a model before it shifts to another model. Instead, it may replace the three-car rotation with a five-car cycle.

To adapt to the flexibility of the production schedule, supplies of spare parts are adjusted to ensure minimum inventories and optimal production procedures.

Fu Shoujie sums up the company’s core competitiveness with four words: integration, speed, innovation, and flexibility. As for Zeng Qinghong, speed is the decisive factor. “The development speed must adapt to the market dynamics, from investments to production release, and then to sales,” explains Zeng.

The speed of product demands to market changes is the core of the speed factor. This is completely dependent on Guangzhou Honda’s “flexible, lean production”.

Discreet Investment and Scale of Economy

The “flexible, lean production” strategy is evidence of Guangzhou Honda’s discreet style, and the company sticks to this style at every critical moment of its investment expansion.

“We always speak of economies of scale, but at Guangzhou Honda, it is the scale of economy that really counts,” explains Zeng when referring to the automaker’s development model.

Zeng says the biggest difference between economy of scale and scale of economy is that the former involves heavy investment to provide optimal benefits to a single product line, while the latter is characterized by rolling investments. In other words, scale of economy means economy before scale. Now, after the scale of economy, Guangzhou Honda returns to the economy of scale.

It might sound confusing, but it simply refers to the discreet investment strategy adopted by Guangzhou Honda, the source of which was a lesson learned from Guangzhou Peugeot Automobile. In 1997, the 12-year marriage between PSA and Guangzhou Auto Group came to an end, with the latter buying the shares from all five majority shareholders for only one Franc (US$0.92).

The failure of Guangzhou Peugeot lay in the fact that PSA introduced an outdated model into the Chinese market. PSA never bothered to update it and eventually it was kicked out of the market. With that failure in mind, Guangzhou Honda required in its 1999 contract with Honda that the launch schedules of the models to be introduced into China must coincide with their international launches. In other words, China would get what everyone else would get.

For the Accord in 1999, the improved “new Accord” in 2003 and 2006, and the “8th-generation Accord” in 2008, Guangzhou Honda has stuck to its commitment to synchronous model introductions. This has helped ensure the Accord’s competitive edge in the mid to high-end sedan market. In China, the Accord has always been a top three seller, which is really miraculous.

Guangzhou Honda’s discreet attitude has been a hallmark of it’s presence in the Chinese auto industry. In its preliminary phase, Honda only planned for a modest 50,000 units output from its incorporation till 2005. This was a far cry from the aspirations of Volkswagen, GM or Toyota.

To cut down on capital expenditures, Guangzhou Honda gave up on introducing a new production line in the starting phase. From July 1998 to March 1999, it decided to make the best use of the existing plant facilities left behind by Guangzhou Peugeot. The company invested in upgrades to the punching, welding, painting and assembly processes and the vehicle testing line. While retaining all former Guangzhou Peugeot employees, Guangzhou Honda spent just nine months retooling Peugeot’s production line for the Accord. This resulted in much-needed cost cutting after incurring heavy debt from the Guangzhou Peugeot acquisition.

“Guangzhou Honda upgraded 60% of the facilities from Guangzhou Peugeot,” claims Qian Minghui, a former employee of Guangzhou Peugeot and former director at Guangzhou Honda’s head office.

Despite an early annual capacity of 30,000 units, and having introduced updated models, Guangzhou Honda still fixed the first-year’s outputs at 10,000 units discreetly. On March 26, 1999, Guangzhou Honda’s first Accord sedan rolled off the assembly line. Eight months later, 10,000 of them had been sold. The Accord’s stunning popularity caught Guangzhou Honda off guard. In 2001, three years after it was incorporated, Guangzhou Honda crossed the 50,000-unit sales mark, four years ahead of its original goal.

Amid the brisk sales momentum, Guangzhou Honda has continued to update its facilities. Guangzhou Honda’s production line has become Honda’s biggest production line among its seven locations worldwide. “Small investments, fast output,” explains Eiji Okawara as he sums up the successful formula.

Guangzhou Honda is heading down a road that is completely unlike the ones being taken by GM and Ford. Most carmakers have relentlessly pursued expanded production lines in a bid to reduce costs and enhance efficiency. But in China, a single production line that is unable to quickly adjust output in response to market changes is a fatal weakness. Guangzhou Honda, however, seems to have lived up to an old Chinese proverb -“It is caution that makes the difference”. It has been this caution that has allowed the carmaker to gain an edge and maintain strong sales momentum in each segment it operates in - with just four vehicle types.

Taobao recently launched a brand-new online marketing model called Taoke. In this model, everyone can help sellers at Taobao with promotion and sales, and receive a commission from the transactions.

This isn’t anything new, though. Since September, when Taobao acquired the online marketing platform Alimama.com, it has been the trend to use this platform to sell products on Taobao. Still, the performance of the Taoke model has far exceeded expectations, after just two months of trial operations.

The reasons are obvious. Firstly, Internet users who have their own websites, often write blogs, visit BBS or chat online are all ideal targets of the transaction-based commission sales model. That is to say, the Taoke model has a very low threshold, making it accessible to nearly all Internet users. Secondly, the sellers, who participate in the consumer warranty program or have done more than four transactions with good responses, can take part in the Taoke program. Statistics show that in the two-month trial operation, the program attracted over 200,000 participants. Nearly 10,000 of them made at least RMB1,000 (US$146) and as much as over RMB10,000 (US$1,460).

Taobao might have started out as an online sales platform, but it now provides marketing services for many users thanks to tens of thousands of participants through the Taoke program. Store operators on Taobao now no longer have to wait passively for Internet users to visit them. Instead, they can proactively promote themselves.

In its model, Taoke participant gets commodity information and codes from Taobao and incorporates that information into their own websites, blogs or BBS. When viewers click the commodity information and place orders, the participant receives a commission. Technically, this model is no different from Google Adsense. But because it is not directly involved in sales, Google Adsense is a pure advertising platform for most businesses. In contrast, through Taoke, Taobao has transformed into a virtual supermarket with abundant commodities.

Taobao is an intermediary platform that is based around Internet users who look for commodities for the shelves. And now it is commissioning them to market commodities on the Internet. It thus covers the upstream and downstream of the value chain. With a body like eBay, Taobao has now grown legs of Google. Consequently, the company, which has been under constant pressure for profits in rapid expansion, has come up with more business prospects.

However, Taoke has a large potential population of participants and they operate with few restrictions from Taobao. As such, this could generate competition from the network of the participants in the future. The experiences that B2C websites such as Joyo.com and Dangdang.com had with subordinate alliances are good examples (See the article Reversion of Online Channels featured in the June 2008 issue).

The B2C website alliances initially looked like the present Taoke program. Some small and mid-sized websites helped B2C websites with their sales and received kickbacks based on the transactions. However, to further increase the traffic, some websites directly channeled the kickbacks to consumers to attract them. Eventually, the profits from kickbacks became scarce. As a result, B2C websites and the kickback websites were no longer two ends of the value chain and instead became competitors.

Recently, Taobao opened the Application Programming Interface (API) of Taoke program to Egou.com, a large kickback website. Along with the progress of this program, more well-performing kickback websites and price comparison sites will join. But if and when the B2C website alliance history repeats itself, Taobao’s program will be severely impacted. Consumers, after all, naturally head to the sites with the best prices. This could affect not only the emerging small and mid-sized channels, but also the traffic and sales on Taobao as well. Taobao is the foundation for all services. Should that foundation be eroded, there will soon be problems up the value chain.

So Taobao’s challenges include not only how to guide users to further promote the growth of Taoke program, but also how to prevent itself from being smashed into pieces once that growth takes off. Addressing that challenge will mean either keeping a safe distance like Google, or gaining more control over the direction of that growth.

In 1995 and 1996, Shandong Qinchi Distillery, which had previously been a little-known company, won two CCTV prime-time commercial bids for RMB66.66 million (US$9.7 million) and RMB321.21 million (US$46.9 million) respectively. The liquor maker became a household name overnight. In 1996, its sales increased fivefold. The bid for the CCTV prime-time slot in 1994 also saw a dark horse rise from nowhere. Shangdong Kongfuyan wine, also a virtual unknown, became one of the best selling wines that year.

Between 1994 and 2007, eight companies were the top winners of 13 CCTV prime-time commercial bids. Apart from Procter & Gamble Co., which is a foreign company, the other seven winners were private businesses. Of the seven, only BBK Electronic Corp. and Hangzhou Wahaha Group Co. are now operating normally. Four winners, namely Kongfuyan, Qinchi, IDALL Technology Co., Ltd and Panda Electronics Group Co., have disappeared from the marketplace.

The remaining one, Mengniu, is currently caught in a consumer confidence crisis. Although both Mengniu and Taizinai are in trouble, the reasons behind their respective problems are quite different. Mengniu’s crisis is due to deficient product quality, while Taizinai’s woes have been caused by excessive expansion.

Compared to some other bid winners from the early days, Taizinai managed to survive for 11 years. This showed that Taizinai at least had some extraordinary merits. According to Li Tuchun, an important reason for the fall of other CCTV prime-time commercial bid winners was that they only relied on commercials, but not on high product quality to satisfy long-term consumer demands.

This was also proven by the fact that Kongfuyan and Qinchi took base liquor from Sichuan and then blended it. Therefore, their product quality was not persuasive. The VCD player produced by IDALL was only a transitional product which was always going to become obsolete. The latest Mengniu crisis was also a product quality issue. Mengniu’s milk products lost their attraction because of the mildly toxic melamine.

Good product quality is surely a major reason why Taizinai survived into 2008. To ensure product quality, Li even abandoned home-made milk powder and instead chose powder imported from New Zealand, despite the higher cost.

But the issue is whether good product quality is adequate to support the long-term existence and success of a company. The funding predicament Taizinai is now undergoing shows that a good product alone is not enough to ensure a company’s long-term growth, despite of large-scale advertising campaigns.

It’s nothing new for private business owners to experience crises. Especially in an emerging market that is experiencing social transition, like China, private businesses suffer some innate shortcomings in terms of strategy and management. Unless the owners have some extraordinary merits, such shortcomings often jeopardize growth and existence of these private businesses.

Devising strategy is a step that a business takes to rationally allocate all its resources around long-term operational goals. Two factors, rationality and long-term vision, are indispensable. Actually, not only the fall of the CCTV prime-time commercial bid winners, but also the failure of any known private business can be attributed to a lack of rationality and of long-term vision.

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The fundamental credit crisis now facing Mengniu demonstrates a key lesson: in order to grow rapidly and quickly gain market share, the company took all measures possible to lower its costs. And this resulted in deteriorating product quality and melamine-contaminated dairy products.

In a time of booming market demand, in 1996, Qinchi brought base liquor from Sichuan and blended it before selling, opening Qinchi’s claims of high product quality up for ridicule. In the case of Taizinai, the company built a lot of production facilities in China, which consumed a large amount of funds, while profits were not high enough to provide adequate support. Moreover, the expected strategic investment was not in place. Eventually, Taizinai was trapped in a funding predicament.

Blind expansion is an inveterate problem for many private businesses. However, on a deeper level, it is not always the problem of private business owners. Indeed, it is unfair to always blame private business owners, who often come from poor family backgrounds but possess exceptional wisdom. However, they are not above criticism either. With the policies for private businesses continuously changing, the safest course of action is obviously to rapidly acquire market share and pocket the money they make.

In the 1980s and early 1990s, to protect state-owned enterprises, the government forced many small and medium-sized private businesses to shut down and go bankrupt for “alleged engagement in speculation and profiteering”. Many of these cases were groundless. In order to avoid imprisonment, many private owners were forced to give away the businesses they had built up through years of hard work.

Faced with such circumstances, private business owners generally resort to two courses of action. The first is to rapidly increase business scale to achieve greater sales. The second is to cut back on non-marketing expenses to prevent enlarged costs. To boost sales rapidly, the simplest way is to increase media investment in a product line and build more channels to “harvest” sales.

The result of this practice is that, strategically, many private businesses tend to blindly expand scale but fail to devote much effort towards improving management. Just like the reign changes in China’s history, the rise and fall of China’s private businesses has been quick and inevitable.

China’s private businesses are often subject to the predicament of strategic expansion and rough management, mainly because of the immature state of the country’s new market economy. This is also why China failed to produce any world-famous companies like Sony, Panasonic, Toyota that rose in Japan after World War II, since its reform and opening up drive started in 1978.

Following China’s accession into the WTO, the legitimacy and property rights of private businesses are now recognized by various laws. As a result, more and more private businesses are gradually breaking from the often tragic past. But its memory does not fade so easily. The veins of many private business owners are still filled with the blood of ambition and determination. And the philosophy of “confronting death to stay alive” is still followed by many private business owners. However, hasn’t anyone realized that business is different from war? If they frequently confront death, they may eventually be killed-not by their enemies, but by their own genetics.

Li Tuchun will not be the last private business owner to fall victim to such tragedy. Only when the transition of China’s emerging market is completed can a new and less perilous era begin.

In October, it was said that Taizinai had ran into financial difficulties. The company was forced to stop production, freeze salaries and seek more funding. Then rumours started that its investors such as Actis Capital LLP, Goldman Sachs and Morgan Stanley had begun liquidating the assets and planning a full takeover, while Li Tuchun, founder and Chairman of Taizinai, had given up control of the company. Even his assets were allegedly frozen.

On October 31, Taizinai announced that it was looking for strategic investors, and was likely to sell shares and production facilities to raise hundreds of millions of RMB, subsequent to a due diligence investigation. The group claimed the investors were renowned companies and venture capitalists in China, and Li was also to keep control of the company.

When asked whether they were considering investing in Taizinai, heads of several famous investment banks and private equities (PE) indicated that only corporate investors such as Hangzhou Wahaha Group Co., Ltd. and Fujian Qinqin Incorporated Co., Ltd. would be interested.

Li Tuchun is caught in a funding predicament.

Confronting Danger to Stay Alive

Li Tuchun had a legendary past. 30 years old, he went to Shenzhen to make his fortune. He had printed wall calendars, sold grain and cooking oil, run a karaoke lounge, a restaurant and, later, a video hall. At the age of 36, he tasted a lactobacillus drink called “Huolibao” for the first time and became convinced it had great market potential. He then went to Huolibao’s producer, a state-owned enterprise in poor shape and with low economic returns, and solicited the chief engineer. In 1996, Li set up Taizinai from scratch, basing the company in Hunan province’s Zhuzhou city.

The rest of the story is widely known. One year later in 1997, Taizinai won the sub-primetime commercial break auction on China Central Television (CCTV) with a bid of RMB88.88 million (US$13 million), immediately making it a well-known brand in China. Later on, he placed ads in newspapers to recruit distributors throughout the country. As a result, Taizinai, the CCTV sub-primetime commercial bid winner, experienced rising market demand and set up a sales network in record time. The small local company whose annual output was less than 80 million packs had suddenly gone nationwide. In this process, media investment undoubtedly made a significant contribution.

This was the most important battle in Li’s career, and helped him come up with a way to develop his company rapidly. Fond of history, Li used to study the rise and fall of many CCTV primetime commercial bid winners in the 1990s. He found that most of them failed because, although they could open the market through TV commercials, they didn’t produce products good enough to meet consumer demands. Li was confident that Taizinai was a good product which could turn profitable within a short time as long as the market was open, and the value of intangible assets (in this case, an RMB88.88 million (US$13 million) media investment) would hold for years.

It was with this confidence in his product that Li betted all he owned on media investment. Quite different from his rivals’ approach, Li first built the Taizinai brand, then fostered the market and, finally, built production facilities. Within a short time, the company had more than 3,000 dealers in China and had become the number one lactobacillus drink manufacturer in the country, with production facilities in Zhuzhou, Beijing and Huanggang.

Li started from scratch and carved his own path by investing heavily in media campaigns. The typical character of Hunan people, ambitious and resolute, helped Li accomplish his success, but also sowed the seeds of future crisis.

Being ambitious and resolute meant that Li at heart believed in the philosophy of “confronting death in order to survive”. He also believed that every crisis had a winning solution. He still talks with much emotion about the first capital crisis that Taizinai encountered.

Soon after Li had bet all he had on the CCTV primetime bid, an investigation showed that the home-made milk power used in his products failed to meet fermentation quality standards. If recalled, these products would have to be thrown away, and the company stood to lose more than RMB20 million (US$2.9 million). At that time, the company not only owed a large amount of commercial expenses, but also faced the huge pressure of purchasing raw materials and increasing production in a short time frame. After balancing the need to tackle the crisis on hand against long-term ambition, Li decided to recall all the products, postponing the payment of employee salaries for more than six months.

This experience, although painful, also helped him realize that product quality was underpinning the existence of his company. For a long time afterwards, the company imported milk powder from New Zealand, although it cost more than twice of local milk powder.

Whether intentional or not, Li is unwilling to compare his company to other players in China, including Mengniu. He stressed in interviews that Taizinai ranked among the top three lactobacillus drink manufacturers in China, and was not in the same industry as Mengniu and other pure milk product manufacturers. According to him, Taizinai produces revolutionary products, while pure milk will soon be phased out. Unlike Mengniu, Yili and other dairy product giants, “Taizinai is against blind expansion of scale,” said Li, “So far, we have not received any financial support from the government. But we can survive and develop on our own.”

From 2002 to 2005, Taizinai’s annual sales increased from RMB100 million (US$14.6 million) to RMB1 billion (US$146 million), as net earnings rose from RMB29 million (US$4.2 million) to RMB100 million (US$14.6 million). Li explained that, in 2002, the company received its first capital contribution from the provincial government after an equity restructuring round. Then it began to establish production facilities in China and entered a period of rapid expansion. This showed that it could only grow rapidly with adequate funding. It also showed that the company continuously confronted funding pressures.

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Funding Predicament

Market and media investments also attracted venture capital to the company. In 2004, since Standard Chartered Bank’s first visit, many venture capitalists were recommending Li to get his company listed. After Mengniu created a miracle of fortune after being listed, Li felt even better. “Heads of the top 50 funds in the world have all become my good friends,” he said. Even the president of the New York Stock Exchange invited Li to get his company listed in the U.S.

At the end of 2006, Actis, Morgan Stanley and Goldman Sachs invested US$73 million in Taizinai to acquire 30% of the company’s shares. There are several reasons why Li chose these investors. Firstly, they had made investments in Mengniu and thus had a better understanding of the dairy product industry. Secondly, although many venture capitalists promised to invest, they needed to wait for the results of due diligence investigations and audits, while Actis and the other two allocated funding before the audit report was even prepared.

Most importantly for Li, though, to partner with some of the world’s foremost investors on an equal footing meant that a local company could suddenly become a top-ranking corporation. Li also indicated that Taizinai would soon go public and be the first Chinese fast-moving consumer goods producer listed in the U.S.

Of course, the investors also set the valuation adjustment mechanism (VAM) terms to protect their own interest, requiring that Taizinai should grow by no less than 30% in the first three years following the investment. Otherwise, Li would lose control of the company. Li concentrated much of his energy on learning about the capital market. He even recruited professionals from securities companies to form his own IPO team which directly reported to him.

Taizinai’s production base in Zhuzhou City. Blind expansion was considered the major cause of the funding predicament.

Unlike the founder of Mengniu, he wanted to keep absolute control over Taizinai, with the intention of holding 70% of the shares before the IPO and 54% afterwards. “The target we announced to the public is to achieve a 50% compound annual growth rate (CAGR) over the next three years, but our internal target is 100% for the next three to five years, and our sales are set to be RMB30 billion (US$4.4 billion), or even more, in five years,” he said confidently.

It is not true that Taizinai had not had any opportunity to IPO so far. The reason it hasn’t yet happened is that, according to Li, the market value of the company was underestimated when benchmarked against the IPO valuation set by Want Want China Holdings Ltd. To get a higher market value, Taizinai built several production facilities in China. It invested RMB600 million (US$87.7 million) in a 37-hectare production base in Kunshan, and the same amount in a 41-hectare production base in Chongqing. By the end of this July, another new production facility in Henan went into production. But, with other new production facilities not yet in full operation, financial problems erupted in August.

It is also not true that Li was not aware of the capital funding pressures caused by rapid expansion. Instead, he was only too confident in the ability of his company to raise fresh funds. “Our ‘dealers’ are not simply dealers,” said Li, “They can buy shares and become our shareholders. In this way, our dealer base will be more stable.” He thus tried to raise funds from the dealers, and considered this concept as a breakthrough innovation in Taizinai’s marketing theory.

Meanwhile he was also preparing for the second round of financing, claiming that 15 banks and consortiums had completed a due diligence investigation and would soon invest US$150-200 million in his company. This potential deal supported Li to continue building production bases in Ningxia and Harbin, in the hope of becoming the top dairy product manufacturer in China.

However, his aspiration was not realized. In 2007, the market was full of advertisements for the lactobacillus drinks of Mengniu, Yili and Bright. All dairy product manufacturers were expanding into the lactobacillus drink market, where they occupied more than 50% of market share.

Investors were starting to become more prudent, mainly due to the Wall Street crisis. Banks came pressing for repayments of loans, because of tightening macro-regulation policies. And dealers were unwilling to advance their payments. Li had not been expecting such a turn of events. According to an executive with Taizinai, the company invested RMB1.2 billion (US$175 million) in 2007. After banks took back RMB500 million (US$73 million), the company’s capital chain broke up.

For Li, the biggest regret in his life was that he missed the chance to overtake other dairy product giants. Although Taizinai was not involved in the recent melamine scandal, it still plunged to be acquired. Actually, if the company had been in better financial shape, it could have taken advantage of the scare and possibly bought out scandal-hit competitors such as Sanlu Group.

Insiders believe Li lost his course not only because the company expanded too rapidly, but also because it got trapped by the VAM agreement set by the investors. “Actually, if Taizinai can’t go public, it doesn’t make any sense to foreign investors even if they take over 100% of the company’s equity,” said an investment specialist, “Actis and Goldman Sachs will pay a big price for taking over the awful mess at Taizinai. Imagine a group of investment bankers trying to sell dairy products.”

ReneSola is a solar cell silicon wafer manufacturer, the number two supplier to leading solar energy companies like Suntech Power and JA Solar, as well as the biggest supplier to Jetion Holdings Limited. By the end of 2008, ReneSola’s production capacity is scheduled to hit 700 megawatts, with sales forecast to jump to RMB5 billion (US$727.1 million). Ranked by production capacity, it’s already the world’s number three silicon wafer supplier.

But the current financial crisis sweeping the world and the possibly subsequent global economic depression is giving everyone the shivers. ReneSola is no exception, and it’s taking measures to protect itself by maintaining a high level of liquidity. The company doesn’t want to be caught on the wrong foot if a major client goes bust or if the bank abruptly stops providing loans.

However, despite the dour economic outlook and the need to keep hefty cash reserves in hand, ReneSola is still going ahead with the construction of a US$350 million polycrystalline silicon plant in Sichuan. The plant is due to begin operations in February or March 2009. One might ask: Why ReneSola, faced with the current economic climate, is so willing to take such risks?

Crisis or Opportunity?

“The solar energy business, in essence, is about costs,” explains Li Xianshou. “If the cost of solar energy power generation was close to that of fossil power, the market performance would be much different.”

An upsurge in the number of solar energy cell plants has pushed the price of waste silicon from US$14 per kilogram in 2004 to more than US$300 today, and US$500 at peak time. Therefore, even if the energy conversion efficiency has been enhanced from 14% to 17% and the weight of raw material required for each silicon wafer drops from 7.2 to 6 grams (or even to 5 grams over the next two years), rising costs would still dwarf these technological advances.

Considering the price of US$3.7 for a cell plate, the costs for power generation are 0.3-0.4 Euro (US$0.39-0.52) per watt. Now in Germany, power generation costs are 0.1-0.2 Euro (US$0.13-0.26) per watt; 0.2 Euro (US$0.2) per watt is the peak time rate. But for the Green Power Retail Strategies in European Utilities, the use of solar energy cells would not be widely standardized. That’s why the global demand for solar cells in 2008 was no more than 6,000 megawatts. In 2008, after Spain implemented the Green Power Retail Strategies on a large scale, silicon prices went soaring again.

“Silicon accounts for 60-70% of solar cell costs. Without the support of our own poly silicon plant, we would never have managed to get our costs under control,” said Li Xianshou. “These costs are normally controlled by upstream operators, to the detriment of the development of long-term competitive edge. So we had no other option but to take things into our own hands.”

ReneSola intends to expand into the upstream of the production chain by setting up factories and facilities.

In August 2007, ReneSola incorporated a wholly-owned subsidiary Sichuan ReneSola Material Co., Ltd in Meishan, Sichuan with an investment of US$350 million to develop a polysilicon production facility with a projected annualized capacity of 3,000 tons. When it’s ready, Li Xianshou intends to expand into the upstream. The company’s polysilicon costs are expected to drop from US$370 to US$80 per ton with the facilities in Sichuan launched into operations. And ReneSola’s goal is to reduce costs to US$30 per ton, 8.1% of the current level. This major reduction in costs would significantly enhance ReneSola’s immunity to risk.

For that purpose, after getting listed on London’s AIM market in 2006, ReneSola went a step further to the New York Stock Exchange on January 29, 2008 to raise US$130 million. No more than half a year after going public on the NYSE, on June 19, 2008, the company issued a new round of shares worth US$200 million. In fact, the first batch of funds had not yet been used, a rarity in the fast moving world of capital markets.

Shortly after the NYSE share issue, Lehman Brothers went bankrupt, bringing the financial markets into crisis. For at least another six months it would be very difficult for any company to raise funding via the capital markets.

Actually, in early 2008 the climate on Wall Street was already very intense. During the whole of January, Li and his team were rushing between stock exchanges and investment banks in New York, gaining a keen experience of the day-to-day agitations of the capital market. However, they reached a stage where they could not wait any longer. Li had intended to have his company go public immediately after the incorporation of its subsidiary in Sichuan, but then the sub-prime lending crisis struck and Li lost confidence in that plan. In January, estimating that the market would worsen further, Li and his advisors decided to move ahead anyway.

Apparently, ReneSola had no idea what would follow. They just feel proud of their sense of urgency that arose from their appraisal and risk assessment of the market. In 2006, after going public on the AIM, ReneSola estimated that the supply shortage in the solar industry would only last for three years. Without a major increase in their competitiveness, they would find themselves under great pressure in a capital and talent-rich industry.

In June 2005, ReneSola was a start-up devoted to the optimization of waste silicon, a material neglected by the market, and the enhancement of its silicon wafer exploitation rate. With thinner silicon wafers, it developed a new market niche. However, competitors soon moved in, driving up the cost of waste silicon. Now, the market price has risen to US$300 per kg, almost equal to that of imported silicon.

In January 2008, ReneSola invested in a semi-conductor silicon material manufacturer in Henan as part of a joint venture agreement, getting closer to polysilicon production in the upstream. Under the deal, the JV company has been supplying most its output to ReneSola. From October 2008 onwards, ReneSola stopped the import of waste silicon as the company prepared to gradually phase out its use by the end of 2009.

“When the price is reduced to US$30 per kg, we will maintain a competitive edge for a long time,” said Li Xianshou. He calculates that ReneSola currently spends about US$2 producing each silicon wafer. But by the end of 2009, the production cost should be reduced to US$1, and power generation costs will be cut down to 0.2 Euro (US$0.26) per watt, equaling that of peak-time fossil-generated energy in Germany. The future of the market looks promising.

“All our strategies are centered on costs: the main cost in producing cells and cell panels comes from silicon wafers, while most of the money spent in making silicon wafers is on polysilicon. With the new poly silicon facilities in Sichuan, we’re now getting these costs under control,” said Li, who is gaining a reputation in the industry for his shrewdness.

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Finding the Right Speed
However, Li still has some regrets about the lost opportunities. If his company had gone public even three months earlier, things would be much easier now. To stabilize its financial condition whilst focusing on the polysilicon project, ReneSola had to slow down other programs. In earlier days, it would have built one plant in half a year, but now, it takes nine months.

ReneSola’s production capacity rose from 80 megawatts at the end of 2005 to 700 megawatts in 2008, and is expected to increase to 1,000 megawatts in 2009, implying a slowdown in the pace of growth. Li claims that ReneSola intends to slow down its order intake, to keep sales growth within the 50% bracket. Comparatively, the company’s net earnings in the second quarter of 2008 were up 289% over the same period in 2007.

ReneSola’s exceptional growing experience results in a special management structure and a shared strategy of “high risk for fast growth” amongst its executives.

Li Shouxian, the CEO of ReneSola has gained a reputation in the industry for his shrewdness.

ReneSola was incorporated in a time when the supply of raw materials for the solar cell industry was falling very short of demand. In its early stages, ReneSola almost completely depended on advance payments from downstream clients. The relatively high debt ratio forced ReneSola to go public on the AIM market to improve its financial condition, though it was just a small manufacturing enterprise in the south of Zhejiang Province which had only been founded less than two years before.

In July 2006, before going public in London, ReneSola decided to recruit Martin Bloom, a partner of Cambridge Accelerator Partners LLP, as a director. He was then elected Chairman of Board one month after the company got listed, because Li Xianshou, being the largest shareholder, gave away the position. Bloom was also UK chairman of the UK-China Venture Capital Joint Working Group. Li had made a wise decision: bringing an outsider into the management team would bring a more objective perspective on the industry and on how to solve various problems.

According to the company’s articles of association, an independent director is independent of the management, and not involved in any transactions that will apparently influence his independent judgment. However, Martin Bloom, with his typical English scrupulousness, introduced a rigorous style into the board. Everyone on the board and management team now attaches a high importance to risk appraisal. At board meetings, the chairman is constantly asking how risky a particular growth opportunity or acquisition would be, and whether ReneSola is capable of maintaining production capacity. Bloom chairs these board meetings regularly, always checking whether the data and contents of a meeting are in contradiction with that of previous meetings. Thanks to the constant questioning process, ReneSola often opts out of investment projects that might help it to grow fast, and instead focuses on steady development.

ReneSola’s operational structure makes decision-making relatively objective. The company’s operational management is divided into two parts: finance and business. The financial department is in charge of investment and financing issues, while the business division is responsible for procurement, marketing and sales. The CEO deals with human resources, key account management and the Zhejiang and Sichuan operations of the company. Generally, after the head of the business division puts forward new investment demands, the head of the financial department will judge whether they are feasible and whether there is enough cash in hand.

“If the financial department believes it is unable to support a new investment project, the proposal won’t get the green light, not even if I put my signature on it,” said Li Xianshou, who, after two years, has got used to not having the final say on such decisions. In most first and second generation privately-run enterprises, the founders are generally too attentive to their individual judgments, and the leader-dominating management system does not provide an effective anti-risk method. But Li is an exception. “Do not grow too fast. Try to control the rhythm,” is his advice. Nevertheless, his company is not afraid to make strategic investments, if they make business sense, even in a time of global economic doom.

Despite the current global economic downturn, ReneSola paid RMB5 million (US$729,790) to head hunters in the first half of 2008. Three directors were hired in the business division to take charge of procurement, marketing and sales respectively. And three more were recruited by the financial department for internal control, audit and financial affairs jobs respectively. All of the newcomers have more than ten year’s experience in top four audit firms.

“The market is changing, and we have to improve our business division. The New York Stock Exchange puts very high demands on listed companies,” explains Li Xianshou. He has also recruited a number of professional managers, and some experts for the company’s production facilities. In May and June, members of Li’s team delivered a series of speeches at Tsinghua and Peking universities, attracting nearly 100 M.A. degree holders (half of them for the research institute and half as management trainees).

“Now, we have high requirements for new recruits. One must be an M.A. degree holder to apply for a management position, and at least a diploma holder to be a worker,” says a proud Li. Now, ReneSola’s management team counts about 500 members, most recruited from around the world in 2008. In a time of the economic crisis, ReneSola intends to spend more time improving itself in order to be better prepared for the tough future.

Li believes the economic crisis will be gone in one or two years and that his company’s advantages in the solar cell industry are not permanent. Competitors are aplenty. Apart from its 3,000 t/a polysilicon production base in Sichuan, ReleSola has built a 3,000 t/a polysilicon base, which is rumored to be expanded to 10,000 t/a in 2009. The polysilicon and silicon wafer market is characterized by an increasing number of suppliers who are all gaining in efficiency and market savvy. ReneSola understands it has to improve its management ability in organizing large-scale production, procurement and logistics to keep its competitive edge.

However, Li still has a trumpet card in hand: in his research institute, a new technology for the direct production of solar energy silicon wafers using metal silicon has been initially developed and is expected to be commercialized during the second half of 2009. With such a technology, massive energy savings can be realized in the production process and this will have a positive impact on environmental protection. Also, ReneSola will continue to develop its crystalline silicon and metal silicon wafers in their respective markets. “We’ll never bet all our resources on a single project,” says Li, smiling.

According to Wang Junjin, Chairman of Okay Airways, the carrier applied for the temporary suspension of operations because its corporate governance structure failed to meet government regulations. The company’s board of directors also dismissed the airline’s president Liu Jieyin.

However, on December 6th, ten days earlier than the announced deadline, Okay operations on Okay Airways’ approximately 20 routes came to an unexpected stop. Passengers were left stranded as major airports refused to refuel the carrier’s planes and declined to provide spare parts and other necessary materials. Normally, the airlines are charged after their planes are refueled. However, since the CAAC’s North China branch gave the green light for suspension of the carrier’s passenger flights from December 15, jet fuel providers decided it was time to call in their debts as Okay Airways has debts of more than RMB200 million (US$29 million). Okay has been in freefall ever since.

Okay’s passenger business accounted for about 80% of its total revenue, and was key to ensuring the company’s cash flow. Without it, Okay could be losing as much as RMB2 million (US$292,368) a day, with ripple effects likely to spread to its cargo business, and even looming bankruptcy.

Its current mess is in stark contrast to the early days of Okay Airways. It was launched in March 2005, as mainland China’s first privately-owned public airline. From its home base at Tianjin Binhai International Airport, it operated 20 routes that included destinations like Changsha, Hefei and Kunming. Okay Airways had annual passenger numbers of up to 1.2 million, accounting for 1/4 of the total passenger volume of Tianjin Binhai International Airport. In February 2006, Shanghai-based Juneyao Group became the majority shareholder of the airline by acquiring 71.4% of Beijing Okay Traffic and Energy Investment Co., which holds 63% interest in Okay Airways.

So what went wrong? Sources say the real reason behind Okay Airways’ current mess lies in an ongoing spat between its chairman Wang Junjin and former president Liu Jieyin. After Juneyao Group became Okay’s majority shareholder, Wang Junjin, took up his present position as chairman, taking over from Liu Jieyin who had held that position up to this. Once Wang controlled the company, friction began to surface between the new shareholder and its original shareholders and management, and lasted ever since.

Previously, Okay Airways’ three natural person shareholders filed a court complaint alleging that Juneyao Group’s promised capital contribution of nearly RMB100 million (US$14 million) never happened. Juneyao Group says it removed Liu as president on the grounds that it could not control Okay Airways. Wang said that Okay had been placing equal emphasis on major and non-core businesses, and on passenger and cargo operations, without a clear business focus. He said this resulted in growing debt arising from day-to-day operations and increasing conflict between the board of directors and individual corporate executives over business development direction.

Since the Provisions on Domestic Investment in the Civil Aviation Industry was introduced by the CAAC in 2005, local private capital has flowed into privately owned airlines including Okay Airways, United Eagle Airlines and Spring Airlines. But most of these companies are still short of cash. Without reaching a certain fleet size, it is difficult for any carrier to achieve low-cost operations or cost advantages. So, it’s not surprising that these private airlines have run into financial trouble after a short time in business.

Okay Airways has lost nearly RMB200 million (US$29 million) over the past three years and continues to hemorrhage. After managing to break even for a short while, Spring Airlines has also been plunged to into financial chaos.

In addition to funding problems, these companies have also had to endure a chronic lack of government policy support. Although the CAAC allows private airlines to participate in the competition, the reviews for route applications have always been more “rigorous”; the result being that the most lucrative routes continue to end up in the hands of the favored state-owned airlines. The private airlines are usually stuck with feeder routes, which are eligible for fewer preferential policies compared with trunk routes. In this context, private airlines in China are at a chronic disadvantage compared to their state-owned counterparts.

In addition, the global financial crisis has impacted all airlines. Since the airlines have relatively higher debt ratio and the sales revenue is an important source of cash, the local carriers are facing the risks of cash flow collapse due to falling demands. To make matters worse, the Chinese government has decided that any bailout money will be targeted only at state-run airlines.

Recent media reports detailed a government rescue package for China’s three major airlines: Air China, China Eastern and China Southern Airlines. China Eastern and China Southern Airlines will likely be handed RMB3 billion (US$438 million) in capital infusions from the government, while Air China would get up to RMB10 billion (US$1.4 billion) in public money. If the deals go through, they would be further evidence of the government’s one-sided preference for the lumbering state-owned carriers. This scenario leaves China’s private airlines exposed to even greater turbulence as they attempt to navigate the financial storms.

Data published by National Bureau of Statistics shows that from January to October 2008, 450 million square meters of commercial residential buildings were sold in China, down 16.5% compared with the same period in 2007. In spite of rising real estate prices compared with the same period in 2007, the growth rate has slowed considerably in the second half. In October, the prices of residential buildings in 70 mid and large cities in China grew 1.6% year-on-year, but slipped 0.3% month-on-month (1.9% lower than September).

In the first ten months, individual housing mortgage loans amounted to RMB280 billion (US$40.9 billion), down 23% compared with the same period in 2007. The third quarter of 2008 China Currency Policy Report published by the People’s Bank of China shows that in the first three quarters, the mid- to long-term loans for the real estate industry reached RMB209.7 billion (US$30.5 billion), accounting for 12% of the increased mid- to long-term loans, down from 15% in the same period of 2007. The figures confirm that China’s real estate market has taken a sharp downturn.

The high real estate prices have curtailed demand even further in an already sluggish market. Supply now far outweighs demand. In Beijing, data from bjfdc.gov.cn shows that, so far, there are 146,000 unsigned existing and forward delivery residential buildings on the market, with about 280 suites signed every day. At that rate, it will take two years to sell off the glut of existing commercial residential buildings on the market.

The RMB4 trillion (US$584 billion) stimulus package has disappointed anxious developers, as it focuses on the faster construction of housing projects targeting low-income urban residents. Recently, the government has decided to inject RMB900 billion (US$131 billion) into the welfare housing program over the next three years.

RMB900 billion (US$131 billion) equals 7 million welfare houses. The Ministry of Housing and Urban-Rural Development of the People’s Republic of China says 6.2 million suites, including low-income housing and renovated state-owned rural housing, will be provided over the next three years. That works out to an additional 2 million suites each year. The ministry claims such housing projects will not threaten the commercial residential housing market. However, the figures have annoyed developers.

The additional 6.2 million suites will siphon off a big part of the consumer demand, further expanding the imbalance between supply and demand, and thereby putting additional downward pressure on the prices for commercial residential buildings. Of course, the welfare housing program does have at least one upside: there is a lot of work waiting for developers. That said, profit margins will be severely trimmed and developers simply won’t be raking in cash like they used to. The government has done what it should do, and the rest is left for market and time to deal with.

How much will housing prices fall? Major influencing factors include the GDP per capita, interest rates, credit coverage, the population and employment. But the most decisive factor is consumer incomes. The proper house price benchmark as defined by the United Nations and the World Bank is three to six times the family income. However, the annual income of a double-income family in Beijing is RMB80,000 (US$11,689), which means there is lots of room for housing prices to drop. Economist Xie Guozhong predicts that housing prices in Beijing and Shanghai could drop by 30%, and that the slump could be even more in small and mid-sized cities. Given the current realities, that seems all the more likely in the next two to three years.

So how long will the real estate downturn last?

The cyclical tendencies of the real estate market tend to follow the economic cycle. According to economic projections, 2011 to 2012 will see the bottom of the economic adjustment for this round. The real estate market has its own characteristics: it periodically undergo a two year slump. As such, it is expected that China’s real estate market won’t emerge from the next downturn for at least two or three years.

Of course, every cycle has its own features. The correction of housing prices, and the speed and extent to which they happen, is largely a game between the developers with a tight fund supply chain and the consumers’ purchasing power and their expectations. It is a fact that the developers’ fund supply chain is tight, and consumer purchasing power is becoming restricted. Yet the developers still refuse to ease housing prices. In the future, the price of commercial residential housing will be closely related to the government’s pricing of welfare housing. The macro economic tendency and the government’s currency policies will play significant roles.

Consequently, the developers have forgone much of their influence on housing prices. Now, they have will to ramp up their own initiatives and hope the market thaws as soon as possible.

The announcement referred to a Ferrero intelligence property rights (IPR) lawsuit that was dragged out into a five year court battle, the first case for which the Chinese court adopted the Law of the People’s Republic of China for Countering Unfair Competition to protect the IPR of foreign companies. The ruling could mean that China’s chocolate pirates will finally be forced out of business.

In effect, the Supreme People’s Court ruling handed a decisive victory to Ferrero over its biggest rival in China, Montresor.

Packaging features like gold foil, fancy labels and transparent boxes are the exclusive patents enjoyed and registered by Ferrero long ago.

Back in July 2003, Ferrero sued Montresor in Tianjin, claiming the defendant used packages and decorations similar to its own designs in a bid to confuse consumers. Convinced that this was an unfair business practice, Ferrero hauled its rival into court to demand that it stop the infringement and provide compensation.

In February 2005, Tianjin Secondary Intermediate People’s Court announced the first instance judgment, which overruled Ferrero’s appeal. Ferrero then appealed to Tianjin Supreme People’s Court, which made the second instance judgment on January 2006, holding that Montresor’s actions had constituted unfair competition. It ordered Montresor to stop the infringement and pay RMB700,000 (US$102,174) for compensation.

But then Montresor appealed to the Supreme People’s Court. That court heard the case twice-in late December 2006 and January 2007-before issuing a ruling in March 2008. It upheld the major points of the second-instance judgment ruling that Montresor’s actions had constituted unfair competition, and demanding it to stop using the packaging and decorations that infringed on the IPR. However, the compensation was reduced to RMB500,000 (US$72,982). The chocolate war is over - at least for now.

The drawn out court battle was essentially over trademarks. As a legendary international chocolate brand, Ferraro began selling chocolates to Chinese in 1984. In Taiwan and Hong Kong, Ferrero used the name Jin Sha for dozens of years. However, it never bothered to register the Chinese trademark in mainland China. It wasn’t long before a Chinese dairy company near Shanghai, the predecessor of Montresor, applied to register the trademark in 1990.

Soon, Montresor’s Jin Sha products became a headache for Ferrero. They looked and tasted the same like Ferrero’s products, but cost a lot less. This meant brisk sales for the chocolate pirates without having to invest a penny in advertising. The success of Montresor’s Jin Sha “branding” strategy also attracted a number of imitators including Jin Meng and Jin Pin. A box of Ferrero would cost RMB39 (US$5.6), but a box of Jin Sha chocolates might cost just RMB25 (US$3.6), and Jin Meng as less as RMB13.8 (US$2). After its first few direct lawsuits against Montresor failed, Ferrero instead decided to try protecting its packaging and decorations.

The case is of great significance, because it was a ruling from the Supreme Peoples’ Court, and it will be instructive to all subsequent IPR disputes involving multinationals. The lawsuit also forced Chinese chocolate makers to come to terms with the fact that although decorations and packaging elements like gold foil, fancy labels and transparent boxes are everywhere, they still fall under the patent of Ferrero. The judgment has essentially squashed the copycat practices of Montresor and some other Chinese companies.

After 18 years in business, Montresor is suddenly clinging to life. And while the management and local government officials all regret what happened, the fact is they still let the copy infringement continue over a protracted period of time.

The Chinese government is under growing international pressure to ensure the protection of IPR. The global corporate community continues to watch how well the government’s rules work in the courts. The aim is to show the world that IPR infringement will no longer be tolerated by foreign companies or the Chinese government.

Under the shadow of the US financial crisis, Zhejiang, whose degree of dependence on foreign trade is around 70%, is now suffering severely from the global economic meltdown. In June, Feiyue Group, a Taizhou-based company, which had been dubbed a “National Treasure”, filed for bankruptcy. Zhang Zhengjian, a former “Top 10 Young Private Business Owner” from Yiwu and owner of Golden Sun Group, absconded, leaving several hundred million RMB of debt in his tracks. These are just two examples of the state of depression in which the province now finds itself. Over 1,200 businesses have closed. And in the first six months of this year, 10,700 large-scale enterprises suffered significant losses. It’s the worst crisis to hit Zhejiang in ten years.

But if the figures are so bad, then why isn’t Liu Xiaoren worried? Despite the gloom and doom, he has just invested in a new company along with several other venture capital investors from Shanghai. His optimism stems from his conviction that Zhejiang’s economy will not go into freefall because it can fall back on a strong venture capital base.

Born in Shangxi Village near Changhua in Zhejiang province, Liu started his career with tea and craftwork businesses. After more than two decades of hard work and capital accumulation, he is now a wealthy man. His rise from nothing is typical of many Zhejiang businessmen. In July 2006, Liu set up the first Zhejiang-based angel investment company, Holding VC, with several other traditional business owners. It was also the first private partnership venture capital company in China. Today Liu is a reputed angel investor in the Internet industry. 

According to Liu, history shows that each time macro control policies were adopted or economic crisis struck Zhejiang, private businesses in the province would experience hardship for some time.

Liu believes times of economic hardship force weak private businesses to grow strong and achieve industrial breakthroughs and advances. This time, although many export-oriented manufacturers are confronted with the risk of bankruptcy, the capital is still there. An abundance of private capital investment valued at hundreds of billion RMB, mainly consisting of private equity (PE) and venture capital (VC), will help Zhejiang find a way out, he says.

It’s no secret that Zhejiang is now transforming itself from a manufacturing base into a real capital giant. Hangzhou, the provincial capital, is now home to over 200 funds and investment companies. Relatively well-developed economic hubs such as Wenzhou and Shaoxing are also home to numerous funds. There are three major kinds of capital investment vehicles in Zhejiang. The first is local government investment, which is intended to guide new businesses and industries. Second are industrial capital groups such as CHINT Electrics, Wanxiang Holding and Dun’an Artificial Environment Equipment, which were established by financially strong private businesses. And last but not least come the many grassroots VCs consisting of numerous private investors.

One of the major pitfalls for inexperienced investors is to follow others blindly in the search for quick success and instant benefit. But for every failure comes a success. Many go on to become top investors who can compete with international players. Hony Capital, which is dedicated to the PE business, and Legend Capital, which is engaged in venture capital investment, are two examples of steady success.