Govindraj Ethiraj: Merger on the Orient-Express

DOUBLE EDGE

The Tata Group's post stake acquisition battle with the management of the Orient-Express hospitality group reminded me of a book I recently read. It's called Dragons At Your Door, How Chinese Cost Innovation is Disrupting Global Competition.

Authored by Professors Ming Zeng and Peter J Williamson of the Cheung Kong Graduate School of Business, Beijing and INSEAD, respectively, the book delves into the success stories of big Chinese brands like Haier, Huawie, Lenovo, TCL and Ningo Bird.

The book also speaks of companies whose names you may or may not have encountered, like the China International Marine Containers Group (CIMC), Shanghai Zhenhua Port Machinery Company (ZPMC) and Pearl River Piano. Suffice that all of them are global volume leaders, if not brand leaders as well.

This is not so much about how these companies have succeeded in the global marketplace, except for one which I will use as an illustration. It's more about what's not worked for the Chinese giants and whether there are analogies to draw with Indian companies and their expansionist moves.

Containers might not sound like a very exciting business. Which is why a good starting point is CIMC's slogan "" "Learn, improve, disrupt." That should tell you something about how the firm, a global leader in containers since 1996, approaches and engages with the marketplace at large.

CIMC made its first container only in 1982, though by 1986, it was in trouble forcing a restructuring. In 1990, it made less than 10,000 containers a year, still a small player, competing with another 20 who had sprung up across China. In 1991, CIMC, spurred by dynamic leadership, began to grow, raising money on the Shenzhen Stock Exchange and then by buying up its competitors.

Over the years, CIMC has gobbled up segment after segment, even buying up its competitors, in one case a German company, from whom CIMC licensed its first refrigeration technology in 1995! The container maker also began "going up" the value chain to focus on higher-end products.

The story is quite long and fascinating. But the bottom line is this. CIMC acquired market leadership through lower costs, which is what a lot of Chinese companies are known for. What is perhaps not so known and a fact that Zeng and Williamson highlight is how companies like CIMC have used the profits from lower costs to build the capability to go high end.

The result over time (Lenovo is an even better example of this) is that the Chinese company actually beguns to eat into the market shares of companies who have "retreated" into the high-value segments. Other such examples include auto component giant Wanxiang, who too has bought out several one-time customers.

Now here is the flip side that in some ways is more relevant from an India perspective. Note that the Chinese have not had similar successes in businesses where their own market is small. Like cars. Or consumer products where the value of something depends on getting an entire system of raw materials, marketing and distribution processes and of course brands.

So it's difficult to attack a component of the FMCG value chain as you could do in electronics or light and heavy engineering. Dragons At Your Door says that's one reason why Procter & Gamble, Unilever and Henkel have done well in China. And then there are the aggregated intangible assets best exemplified by businesses like retail "" Wal-Mart, Carrefour, among others.

Over the longer term, the Chinese will step up their purchase of intangible assets, which includes brands and technology, as Indian companies like Tata Tea (through Tetley) have. Or learn very quickly from their joint venture partners. AVIC, a Chinese firm and Airbus supplier, has already developed a 60-seater regional jet that apparently costs 30% less than competing aircraft.

So now to return to the Orient Express or for that matter Jaguar bids. The perception battles relating to intangibles will always be higher since Indian companies are seen mostly as cost champions. This is and will change but a Vikram Pandit's elevation to Citibank's top job does not hasten the process.

The Tata small car project fits well into a global small car strategy. And customers the world over will buy into this. Ditto with steel or any other commodities and engineering products. Notwithstanding the initial perfume and cologne response to L N Mittal when he bid for Arcelor. But the same will not come that easily at this point for a premium product like a Jaguar.

Would you buy a Jaguar if it were owned by Chinese car giant Chery ? Similarly, what if homegrown Chinese hotel chains like New World Hotels or the budget Home Inns & Hotel Management Inc (over 200 properties) were to bid for Orient Express ? So you will win some and lose some, at least at this stage of the perception race. Meanwhile, it might help to focus on learning and improving before disrupting!