a publication of the acrc spring 2007 japan's … · a publication of the acrc spring 2007 ......

A Publication of the ACRC Spring 2007

The Japanese archipelago occupies only 3,008km of the Western Pacific

Rim, yet it has the world's second largest economy. Its population of

127 million is densely packed into its hyperbolic major cities. Tokyo

and Kyoto are an urban dream of overbuilt modern architecture and

hi-tech efficient subways, whilst Zen-like serenity can be sought in the

many temples, shrines and ancient customs which abound.

To examine Japan's economic infrastructure, though, one must first

consider its people and the events that have led to its internationalisation.

A homogenous race, 99.4% of the population is Japanese. Political

history and empirical traditions may be indicative of Japan's seclusion

in the early days but language has also been a natural barrier to a better

understanding of the culture for foreigners.

The legal and civil codes of Japan have their roots in Germany and

France, which were originally implemented in the late 19th century.

The legal structures were influenced more by Europe than the USA.

After the second world war, the supreme commander of the allied forces

implemented Japan's constitution, which gave rise to anti-trust regulations.

The USA sought to break up the wealthy elite conglomerates that

dominated Japan; however, they remain powerful even today. During

most of the post-war period (1945 to mid-1990s), anything that fell even

slightly outside the code of law was unequivocally prohibited, greatly

restricting new business practices. The last six years have seen this logic

completely reversed.

For a nation whose instincts remain rooted in the hallowed beliefs of its

ancestors, Japan has, paradoxically, become a global player in the field

of innovation and technology. Post-war recovery efforts have seen rapid

expansion; Japan's car production and high-quality electrical goods were

sought after worldwide, and export became the foundation of its economy.

Japan's Economic Revival?

was that it had helped Japanese car exports to

the US rise by 30% at America's expense.

Further to this, Japan's finance minister, Koji

Omi, declared the recovery as sustainable,

evident by a recent rise in interest rates and

strengthening of the yen.

Although Japan is a cash-rich society, the

disparity between the classes continues to

widen. The winners of capitalism are evident,

yet some still go hungry. While billionaire

families and conglomerates, such as Nomura,

Mitsubishi, Mitsui, and Sumitomo, have

survived the economic downfall, a new breed

of capitalists has arisen in Asia today: the

young entrepreneur. Venture capitalists,

technology investors and private equity firms

are cashing in on these new economic times.

Emerging markets, such as those in Asia,

remain attractive to the investor: it is possible

to make quick gains (and losses) and the

furious pace of the economy offers an exciting

alternative to traditional investments in major

markets. The downward-spiralling share prices

have caused low valuations; in a bullish

market, the strongest stock markets have been

the secondary and tertiary financial markets.

Surges in economic growth and low interest

rates in Asia have prompted increased

investment capital into Asian markets.

Currency trading remains big business with

the yen carry trade (the practice of borrowing

low yield currencies) providing an

international money flow. Leading finance

ministers at the G8 continue to talk up the

Japanese economy to prevent a further decline

of the yen.

Japan's government welcomes direct

investment from abroad, and new regulations

in 2007 will allow foreign companies to use

2

Japan is the largest source of capital in the

world. Its net foreign assets amount to an

immense US$1.5 trillion, compared to the

liabilities of the US at US$2.5 trillion.

Furthermore, saving has become an inherent

part of Japanese culture. Japan manufactures,

exports and builds large cash reserves.

Conversely in the West, people prefer to spend,

provide services, import and run up deficits.

Keeping these factors in mind, and if we can

say that Japan is an Asian powerhouse in the

21st century, we should ask why it has been

suffering from a recession for ten years.

To answer this we must look back to 1989-

1990, the glory days of high-value real estate

and over-inflated stocks which eventually led

the bubble to burst. Cross-shareholdings

between banks and businesses were part of

keiretsu: protectionism offered by business

groups which sought to minimise risk.

Suddenly, with the economic bubble bursting,

these assets were wiped out. The burden of

bad debts and company lending made the

Japanese economy buckle at the knees until

growth slowed to a standstill.

The government recognised the need for

action. The prime minister, Mr Hashimoto,

resigned from office due to the economic

downfall. The earthquake in 1995 and the

infamous poison gas attack on the Tokyo

subway further took their toll on an already

deflated economy. The 1997 Asian financial

crisis and recession prompted dramatic

reform in many areas such as banking,

consumer spending and business

corporations. Prime ministers Keizo Obuchi

and then Yoshiro Mori tried without success

to revitalise the economy. It was their

charismatic successor, Junichiro Koizumi,

who eventually kick-started the economy

into life. A cabinet reshuffle ended rampant

protectionism and rigid measures to affect

deep structural shifts in policy, slowly

putting an end to the financial volatility Japan

was experiencing. Old mindsets about Japan's

immunity to economic depression were no

longer a hindrance to the globalisation of Japan.

With the exception of major companies, such

as Canon and Nippon Electric which

determined to keep their employees at any

cost, the Japanese saw the end of a job-for-life

mentality and the reassurance of a secure

pension. Japan is still suffering from high

unemployment, and whilst the car

manufacturing industry helps sustain the

economy and provide labour, Japan has had

to relocate some of its manufacturing sites to

the US and to look to the Chinese mainland

for affordable labour. With cracks appearing

in the US economy, the US imposed major

restrictions on car imports to protect its own

car manufacturing plants. Some conspiracy

theorists have alleged that the yen was being

artificially weakened as a direct result of policy

in Tokyo. The rationale behind this thinking


share swaps, as opposed to cash, to facilitate

takeovers. Japanese managers are

understandably nervous at the prospect of

takeover bids that are not necessarily friendly-

the old safety net of cross-shareholding cannot

counter aggressive investors. Efficient hostile

takeovers can, however, turn around poor

performing companies as well as the

undervalued stock prices of listed Japanese

companies and still leave the indigenous

management in place.

Defensive moves by Japanese companies to

avoid takeovers are not uncommon. These

include raising stock prices and merging with

other Japanese partners. More and more

Japanese companies are using the "poison

pill": a strategy enabling newly issued shares

to be bought at below-market value by existing

shareholders and which are then sold at a

premium following a takeover. This results in

an over-priced stock which is no longer

attractive to hostile bidders.

One much-publicised hostile takeover was

that of Fuji TV vs Livedoor for Nippon

Broadcasting Services (NBS). An iconic

entrepreneur, Takafumie Horie created

Livedoor, a startup company which quickly

led the field in information technology (IT).

To expand the company, one stock was split

into 100 new stocks. To further continue the

growth of the company, he bought out existing

companies. His belief that merging IT with

media would ensure further expansion led

him to target Fuji TV. Both Fuji TV and NBS

were cross-shareholders, so Horie believed

that by acquiring NBS through a takeover bid

he would automatically own Fuji TV. The share

trades which followed led to Livedoor and

Fuji TV both trying to take over NBS and

ultimately ended in a court battle for control.

Livedoor made the acquisition using US$765

million through an American investment bank,

Lehman Brothers. Subsequently, Horie was

arrested for allegedly violating the Securities

and Exchange Law.

Corporate acquisitions are now a harsh reality

in Japanese society, with particular

vulnerability to US-controlled multinationals.

Japanese executives are now coming to terms

with this fact and their main concern is for

corporate value. They are slowly warming to

the idea that a hostile takeover may in fact

increase the corporate value. Japanese

corporate strategic planners have adapted to

the threatening environment and are acutely

aware of competition. For Japan to retain its

place on the world stage, it must progressively

look to the emerging markets.

Tokyo Disneyland and the DisneySeaPark: Corporate Governance andDifferences in Capital BudgetingConcepts and Methods betweenAmerican and Japanese CompaniesMitsuru Misawa

Tokyo Disneyland: Licensing vs JointVentureMitsuru Misawa

Japanese Banking: Crisis and ReformJames Newton, Michael Enright, Elyssa Tran

A Rogue Trader at Daiwa Bank (A):Management Responsibility underDifferent Jurisprudential Systems,Practices and CulturesMitsuru Misawa

A Rogue Trader at Daiwa Bank (B):The Board Meeting on 25 September1995 in JapanMitsuru Misawa

Japan Net Bank: Japan's First Internet-Only BankAli Farhoomand, Pauline Ng, Vincent Mak

Seiko Watch Corporation: Moving aBrand UpmarketAli Farhoomand, Tom Hout, Amir Hoosain,

Mary Ho

(video available)

Core Competence at NEC and GTEMichael Enright

EUROCAP Bank: Bonuses DrivingPerformance or Driving DiscontentGilbert Wong, Heather McGregor, Michelle Ng,

Pauline Ng, Shamza Khan

NTT DoCoMo: Establishing Global3G StandardsAli Farhoomand, Vincent Mak

Japan Airlines: The Impact of e-TicketingAli Farhoomand, Amir Hoosain, Lucy Fung, Shamza

Khan

Seven-Eleven Japan: Venturing intoe-TailingAli Farhoomand, K K Tan

The Japanese Facsimile Industry in1998Michael Enright, Andrew Lee

Proactive Planning before CrisesHappenFreddie Lee, Gilbert Wong, Mary Ho

People Management Fiasco in HondaMotorcycles and Scooters India LtdDebi Saini

Ina Food Industry:A New Management Philosophy forJapanese BusinessesMitsuru Misawa

OSG Corporation: Risk Hedgingagainst Transaction ExposuresMitsuru Misawa

Bank of Japan's Meeting in March2006: An End to the QuantitativeEasing Policy?Mitsuru Misawa

Nireco Co., Japan: Introduction of thePoison PillMitsuru Misawa

Livedoor: The Rise and Fall of a MarketMaverickMitsuru Misawa

Hostile Takeover Battle in Japan:Fuji TV vs Livedoor for NBSMitsuru Misawa

3

Japanese cases published by the ACRC

4

The Educator'sPerspectiveDr Ulrike Schaede is a professor of Japanese business and management at the Graduate

School of International Relations and Pacific Studies, the University of California San

Diego. She conducted research in Tokyo over extended periods, including at Hitotsubashi

University, the Bank of Japan, the Ministry of Finance and the Ministry of Economy,

Trade and Industry. She is the author of multiple books, papers, and chapters on Japan's

government-business relationships, financial markets and corporate strategy.

US: Particular interest was shown in Asia during the economic

bubble period 1987-1991, after which the bubble burst and Japan

fell into recession. The bubble was a period of stock market and

real estate speculation. When these markets crashed, the resulting

loss in value of equity as well as the collateral on which the loans

were funded left the banks and their customers reeling. Decreased

consumer spending and manufacturing left companies unable to

make outstanding interest payments on their borrowing. The banks

tried calling in the loans but found they were stuck with collateral

worth a fraction of the lending.

The 1990s was a period of stagnation for the banking industry as

it waited for a turnaround in the market or for the Japanese

government to bail them out as it had done previously. In 1998 it

became apparent that there were too many non-performing loans.

For six years banks had tried without success to claw back the value

of the loans and the banks were close to a financial meltdown.

Eventually, the government bailed them out.

Nineteen ninety-eight was also the year of the financial Big Bang.

The prime minister, Mr Hashimoto, initiated a package of financial

de-regulation measures which incorporated rules on accounting

and transparency, now referred to as the Sunshine Laws. Whereas

previously it was virtually impossible to decipher Japanese balance

sheets, banks were now required to be transparent and report

directly on the performance of all loans. Regulatory power was

moved from the Ministry of Finance and given to an independent

agency, the Financial Services Agency. Questions were raised as

ACRC: Ten years after the Asian economic crisis we are seeingmajor changes in Japan's economy and society. When didthese changes occur and what is driving them?

to whether it would be truly independent; however, under its

supervision, the banks have been able to create clear and

comprehensible balance sheets.

In my research, I refer to what happened next as a "strategic

inflection" for Japan's political economy: markets, and the political

economy overall, changed so drastically that it now takes new

strategies to compete in Japan. This was also pushed by the prime

minister, Mr Koizumi, a powerful strategic leader, as he was

consistent in his message for reform and would not waiver.

Koizumi's government also pulled back decision-making

responsibilities for reforms to the Cabinet level. This had an effect

on previous regulatory processes in which ministries could shape

the pace of reforms.


5

US: Japan has an ageing society, coupled with a low birth rate

which is a trend that needs addressing.

Equal opportunities for women in the workplace is still a problem

in Japan, with women opting to marry later, unable to find a

compromise between motherhood and career. Another factor evident

in most countries during a recession is usually a decline in birth

rate; affordable education is a deciding factor for those planning

to have a family in Japan.

If we consider immigration, the number of foreigners in Japan has

risen dramatically. (There has been a big inflow in nursing and

manufacturing.) The country has been heading in the right direction

and can now be compared to France or Germany in its immigration

policy.

Until recently it was very difficult to allow immigrants to enter the

country to aid the labour market. Now, however, the financial

market has opened up, and with new banks, competition is rife for

new employees. Legal services is another market that is ripe for

outside recruitment. I am optimistic in this area since the laws have

changed. However, it may take another 5-10 years to make an

impact. And it all depends on how fast the Japanese society adjusts

to these changes. It may take half a generation, but although the

social structure is complicated, it has certain advantages over

countries in Europe.

ACRC: What are the key demographic factors at play in Japan?

US: The government is concerned with how this will impact the

state pension system. The post-war period was a time of long-term

employment with a low retirement age of 55-60 years. People were

then re-employed by their employers on different terms. The

retirement age is now 65.

The government is attempting to make it possible for women to

stay in the workforce. Data shows that compared to 15 years ago,

working conditions have improved dramatically for women. The

equal opportunity law means women are empowered with legal

rights.

Another consideration for the government is childcare. The work

culture of Japan is changing rapidly with social reform. Previously

there was blatant discrimination with women having to leave work

early, to forego promotions and to decline relocations in order to

fulfill their role of taking care of their elderly relations or young

children. Now, however, there are signs of change. Although there

is still only a small percentage of women in managerial positions,

this number is growing. There is now an improved social impression

of the professional woman.

ACRC: How is Japan going to cope with a rapidly ageingworkforce?

US: In 2006, Japan put into effect the Corporation Law. It supersedes

the previous, archaic corporate laws and also includes new rules

and corporate governance. In 2007 there will be the new "Sox" law,

based on the Sarbanes Oxley Act which was introduced in the US

after the Enron scandal. Whereas directors on the board of a Japanese

company were not previously liable, strict regulations of the new

law pin liability on directors, and shareholders are empowered to

sue.

ACRC: Japan has chosen to import aspects of foreign culturesand legal systems which suit Japan. Do you think it is timeto import some aspects which are less palatable, such astransparency and accountability?

US: Foreigners have become increasingly interested in the Japanese

economy. In 1989, at the height of the bubble period, foreigners

held only 4.3% of the shares traded in the Tokyo Stock Exchange.

In 2006, they owned 27%, almost one-third of all shares traded in

the Tokyo Stock Exchange. The majority of these holdings are in

the hands of UK and US trusts. Additionally, aggressive activities

by foreign and domestic private equity funds are also a large trigger

for change in Japan.

ACRC: Foreign investors are reluctant to fall foul of Asia'sgovernance problems and complex business infrastructures.Will this be a deterrent or will the rewards outweigh the risks?

US: Current concerns are directed at combatting the pension

challenge. Additionally, an ageing society and low birth rates are

high on the agenda. Close attention is being paid to the relocation

of manufacturing to mainland China which may cause increased

unemployment in manufacturing; it may, however, cut back on

inefficient and non-competitive businesses.

ACRC: What does the Japanese government perceive as thegreatest threat facing Japan's economic development?

US: It will always be difficult for some core part of society to

embrace internationalisation and they will prefer to follow traditional

values. However, the reforms of 1998 produced the banner "Free,

Fair and Global". The Japanese telecommunication industry

represents the entrepreneurial spirit of a younger generation, keen

to effect globalisation. Also, the new generation of business

executives entering Japan will pile on the pressure for reform.

ACRC: What image do you think Japan is keen to project tothe international community? Does the Japanese populacesee itself moving forward under its own momentum or is itbeing forced ahead by external factors?

US:My research has revealed that during the post-war period,

business groups had a strategic function to provide stability, to

help trading partners, and to provide security against takeovers.

These business groups were known as keiretsu. The stability

provided by these groups helped the survival of companies in a

rapidly growing market. At one stage, Japan was growing at a rate

of 10% each year which required the stabilising influence of these

business groups. However, beginning in the 1980s, the sources of

financing for large firms changed from the old main bank system

to markets for stocks and bonds, a growing portion of which were

owned by foreign investors. All this contributed to the processes

of strategic inflection in Japan.

More than ever before, companies now need to be profitable to

attract investors. A stable, slow-moving, large firm is unattractive

to investors. As a result, the value proposition of business groups

also needs to be repositioned. The business groups of the keiretsu

which offered stability and security are no longer as valuable for

corporate success as they used to be. As a result, many of the cross-

shareholding companies are winding down, and some groups are

changing their functions.

ACRC: Please briefly explain the principles of keiretsu. In aglobal market, will Japan be able to use keiretsu to itsadvantage?

6

US: As mentioned earlier, legal revisions were made that culminated

in the introduction of the Corporation Law. There is more confidence

in the market, and managers enjoy greater freedom in designing

differentiated corporate strategies. The law provides clear-cut rules

on stocks, restructuring and spin-offs. With the banks selling off

bad loans and companies selling off non-profitable businesses, a

new market for mergers and acquisitions has been created.

Previously, takeover bids were rare, typically only one to five per

year. Yet last year we saw over 50 successful hostile takeovers. All

of this is clearly market-driven. Perhaps most interestingly, almost

all of the hostile takeovers we are witnessing are domestic.

ACRC: Mergers and acquisitions are now commonplace inbusiness. How will Japan overcome its traditional values toaccept this practice as part of internationalisation?

US: From an executive perspective, if you put yourself in the shoes

of a CEO, the critical aspect is consistency of the ongoing plan. The

prime minister, Mr Koizumi, provided this consistency. However,

the new prime minister, Mr Abe, needs to get this message across

to enforce economic policy. The main challenge for the new prime

minister is not to waiver on the crucial domestic economic issues

since his immediate concerns seem to lie with foreign policy.

ACRC: Will Japan's adoption of global economic and financialpractices be enough to instil confidence in foreign investors?


Interview withSchinichi IchikawaChief Strategist with Credit-Suisse First Boston Securities (Japan) Limited

Schinichi Ichikawa, CMA, heads up equity research at CSFB in Tokyo

SI: Compromises seemed to have been reached between the Bank

of Japan (BOJ), the government, the ruling coalition, the LDP and

the Komei Party. It would be reasonable to assume that the central

bank wishes to maintain its flexibility by increasing the over-

night call rate, a BOJ policy measure. On the other hand,

Japan has to address problems with its fiscal debt problem.

It is these problems that will continue to tighten fiscal

policy, which in turn will give deflationary pressure

to the economy. In this case the government must

expect the BOJ to ease such pressure by keeping

monetary easing, in other words maintaining a

low interest rate policy.

ACRC: Japan's central bank recently raised its benchmarkinterest rate by a quarter point to 0.5 %, only the second risein the past six years. Studies report this to be due to increasedconsumer confidence, healthy production, income andcompany investments. Could an alternative explanation bethat the central bank is bowing to political pressures to counterweakness in the yen?

SI: The current estimate for the pure yen carry trade is, at most,

approximately $80 billion. Plus the additional speculative position

of Japanese personals, the amount could total $100 billion. Although

this in itself may have an unwinding influence it would not

be so large as to destroy the global financial market.

On the other hand, Japanese mutual funds and pension

funds have $400 billion invested in foreign assets. If

the yen goes up rapidly, these investments will not be

so sensitive to the change in exchange rate. We believe

that the market is currently overestimating the yen

carry trade.

ACRC: Could you explain the effect of the yen carry tradeon Japan's economy and its place in the global market?

7

The BOJ may have agreed not to raise the overnight call rate for

the near future. It is likely that this decision followed the BOJ policy

board meeting in February. Since this meeting, the government has

reserved any adverse comments on the bank's decisions to avoid

what may be perceived as overt conflict with the BOJ.

SI: In January the trade surplus had increased 329 billion yen from

the previous year. This alone was the biggest driver and could

explain 72% of the increase in the current account balance. We think

the reasons are three fold; a weak yen, a strong demand from US

and a price reduction in commodities.

ACRC: Last January Japan's current account surplus, ameasure of Japan's trade with the rest of the world, stoodat 1.194 trillion yen (US$10.08 billion). Japan's FinanceMinistry revealed that Japan's current account surplus hadgrown 49.8% in the previous year. What was behind this?

SI: The easiest area for foreign funds to invest in is with property.

The advantage being fair valuations can be made with little difficulty.

However, the most profitable investment area is in technology.

Especially since we believe that Japanese middle class listed

companies are holding back many of their most promising

technologies.

ACRC: There is a burgeoning supply of private equity firms

looking for cash riches in Asia. In what areas do you see the

best capital growth for outside investors?

SI: Foreign investment activity in the Japanese business community

is obviously more complicated by cultural issues compared to the

West. Foreign investors should be prepared to invest for longer

terms to reap the benefits. We believe that, understanding cultural

differences is vital to good performance.

ACRC: What strategies should a foreign management teamemploy to best infiltrate the business community in Japan?

8

SI: The Flexible Consideration Act, part of a new Commercial Code

will be effective from May '07. As a result, foreign companies can

take over Japanese peers strategically by using their own shares.

Along with this revision the government has decided to revise its

relevant tax regulations; there will be no capital gains tax despite

latent profits. We think that foreign companies will feel more

comfortable launching into takeovers under these provisions. We

are already seeing forward looking private equity funds investing

in some older Japanese companies.

We believe that, before M&A activity by foreign investors takes

place, we will see reorganization between Japanese companies.

One identifiable threat to foreign M&A activities is the poison pill

tactic. However, Japanese companies would face difficulty

implementing such tactics considering that the M&A activity is

likely to increase corporate value. If these company tactics become

the subject of court judgments recent history has shown the outcomes

to be biased towards the shareholders.

ACRC: Mergers and Acquisitions are the buzzword in Japan;however previous attempts have fallen short of the mark.Can you explain how the current legislation will affect M&Aactivity?


9

SI: For the past 15 years we have encouraged foreign investment

in Japanese equities. We should now also encourage the Japanese

public to invest in a similar manner. This will allow the Japanese

people to enjoy capital profitability from Japanese companies

especially if they have personally endured restructuring of these

companies. Whilst we would not want this sentiment to appear

protectionist we feel the government should recognize the very

people who built Japan's economy by giving them tax concessions

on their private investments.

ACRC: Japanese listed companies now welcome outsidedirectors with transparency and corporate legislation becomingcommonplace. What must Japan do to avoid further economicstagnation?

SI: There is no short-term solution, it is important that a robust

long-term stategy is adopted. Since Japan relies on imports for

almost all of it's raw materials, intelligence capital will be one of

the key solutions to maintaining competitiveness in a global

market.

The focus for future strategy should be the strengthing of the

education system. We believe the first step should be to increase

the teacher salaries to attract high quality teaching staff into the

state system. Secondly the government needs to encourage

competition between schools with the budget-related bonuses for

the schools that perform well.

ACRC: With an increasing disparity amongst the people ofJapan, an ageing population, a shrinking workforce, andcompetition from emerging countries in technology-basedindustries, what strategies for advancement are taking placeto help Japan become part of innovation globalization?

10

Shanghai Tang: The First Global Chinese Luxury Brand?Bennett Yim, Monica Park

When he created Shanghai Tang in 1994, Hong Kong businessman David Tangintended to launch China's first bona-fide luxury brand. In the first few years,Tang's flamboyant, cross-cultural style and ties to celebrities fuelled the buzzsurrounding the brand. But the brand was unable to establish its core customeroutside its home market of Hong Kong, and the company struggled to find a nicheamong successful, established global luxury brands. In 2005, under new leadershipand revised creative direction, Shanghai Tang expanded into several regionalmarkets worldwide, with a particular focus in Asia. But was the company on trackto become the first global Chinese luxury brand? This case is appropriate forundergraduate students and can be used to introduce and illustrate the conceptof luxury branding in a global context. Used alongside supplementary articleslisted in the teaching materials, the case engages students to think about brandingissues relevant to the luxury apparel segment.

Marketing

Newly Released CasesFor full case summaries, please visit our website www.acrc.org.hk

Procomp Informatic: Stepping on Ethical Landmines in AsiaAmy Lau, Claudia H L Woo

The collapse of Procomp Informatics Ltd, a major Taiwanese chipmaker, hasbeen regarded by Taiwan's market watchdogs as similar to the scandal of theUS energy giant Enron in 2001. In June 2004, Procomp defaulted on a bondpayment and structured for bankruptcy, despite a huge cash balance recordedin its books. It was discovered that the company's executives and its overseassales agents had colluded in overstating sales revenue, manipulating stockprices, illegally leveraging assets and arranging bonds through paper companies.The incident left thousands of company shareholders with massive financiallosses. The case has raised concerns about corporate governance and riskmanagement of public companies in Taiwan. It has called into question thecredibility of the financial reporting process, companies' internal controls andcorporate ethics in the Asian context.

Accounting and Control, Social Enterprises and Ethics

EDB and Friends: Reviving a Mature Brand through InteractiveOnline MarketingKineta Hung, Monica Park

In Hong Kong in 2001, a leading eye drop brand's position was threatened.Although it was a top selling brand (from here on referred to as EDB), overalleye drop usage was declining and the entire category was shrinking.Furthermore, customers showed no particular brand preference and price alonedetermined sales. To better understand the situation, the company surveyedEDB's target customers and discovered that its brand image was outdated andthat its core users had aged with the brand. Thus, in order to sustain a long-term customer base, EDB needed to realign with its target audience andreposition the brand. The company hired Beyond Interactive to help them facethese challenges. The Beyond team came up with a one-to-one interactive onlinecampaign, EDB and Friends, aimed to achieve three objectives: reposition thebrand towards a younger audience, rejuvenate the brand image and establishbrand preference. With its games, its likable virtual personality and relevantcontent, EDB and Friends helped the company achieve its objectives and theaward-winning campaign was a commercial success. The case is appropriatefor undergraduate students and can be used to introduce and illustrate thefollowing concepts: one-to-one marketing, brand revitalisation and repositioning.The case provides a best-practice example of a creative online marketingcampaign.

Marketing

Organisational Transformation: Agency For Volunteer ServiceGilbert Wong, Joseph Chan, Monica Park, Shirley Chan

Founded in 1970, the Agency for Volunteer Service (AVS) was a non-governmentalorganisation in Hong Kong with the mission of facilitating volunteerism andmanaging education, health and welfare services. For more than two decades,it played an active role in the Hong Kong social service sector. However, in theyears 1998 to 2001, several factors prompted AVS to undergo organisationaltransformation: a temporary crisis in management, a change in the source ofgovernment funding signalling a shift in the organisation's mission, and theUnited Nations's designation of 2001 as the International Year of Volunteers.These changes compelled AVS to carry out a strategic review in 2001 andundergo radical organisational transformation. How should it implementstrategic change to incorporate this new vision? This case introduces studentsto the concept of radical organisational transformation and familiarises studentswith managerial competencies common to successful transformations.

Strategy and General Management

Wumart Stores: China's Response to Wal-MartAli Farhoomand, Zhigang Tao, Iris Wang

Wumart Stores (Wumart) is an indigenous Chinese, privately owned retail chainoperation founded by a private entrepreneur in 1994. The decade after itsinception sees the company grow from a small, suburban supermarket to theseventh largest chain retailer with over 500 stores in China. By using a regionalmarket positioning focusing on one of China's wealthiest regions - Beijing;using low-cost expansion strategies, taking the opportunity to restructure state-owned assets; using a multi-format store development in both the most matureand fastest growing segment; and making the earliest commitment to informationtechnology among its domestic peers, Wumart establishes strong competitiveadvantages that set it apart from its domestic competition. On the company'stenth anniversary, China fully opened its retail sector to foreign participation.Vying for a share in China's vast consumer market but having been hinderedby many regulatory obstacles, foreign retailing giants can now compete on alevel platform backed by their ample financial resources, deep industry andmanagement expertise, and long-term commitment to China. The market isbecoming ever more competitive and is expected to experience massiveconsolidation. In the end, only the best performers with significant scales willsurvive. The test is for Wumart's management to develop strategies in orderto sustain its competitive advantages in the face of challenges from both domesticpeers and foreign giants, to carry on the success story and to realise eventuallyits ambition to become an everlasting national brand. This is a managementstrategy case that deals with business expansion and the source of competitiveadvantages and their sustainability in an emerging market environment.


Hyundai and Kia: Automobile Branding in ChinaYong June Kim, Amy Tang

Beijing Hyundai Motor Corporation and Dongfeng Yueda Kia Motors wereboth troubled by the problematic sales trend of their locally branded cars. Atthe same time, a Brand Power Research Study conducted by Hyundai and Kiain China showed that both companies still had significant room for improvementin strengthening the power of their corporate branding in inducing consumerpurchases. This case illustrates the importance of global branding whencompanies expand overseas. It allows students an opportunity to evaluatecorporate and car branding at both international and local levels.

Marketing


11

Infrastructure Finance: The Sydney Cross City TunnelFrederik Pretorius, Mary Ho

This case explores events surrounding the development of the Sydney CrossCity Tunnel, an innovative infrastructure project developed by the New SouthWales government in Australia in conjunction with Cheung Kong Infrastructure,Cheung Kong's Hong Kong listed infrastructure investment arm. The tunnelopened for traffic in 2005. This case analyses three matters: the political andinstitutional background that led to the decision to develop the Cross CityTunnel; the general economic assumptions upon which the venture had beenbased; and the build-operate-transfer project finance arrangements put intoplace to develop and finance the tunnel venture. The case explains the projectfinance arrangements surrounding a typical road transport infrastructure whichseems to have failed, and raises questions about estimates of demand for thetunnel and traffic management arrangements surrounding access to the tunnel.

Finance and Investments

Oil Refining In ChinaKa-Fu Wong, Mark Stimson

A strategic planner for an international oil and gas firm, Ed Chen was taskedwith reviewing China's petroleum refining industry to seek out potentialinvestment opportunities. Globally, demand for transportation fuel was on therise and government clean fuel standards were becoming strict. As refineriesstruggled to adapt to tightening product quality requirements, those able toefficiently produce a high proportion of light products from heavy and sulfurouscrude oil prospered the most. World refining capacity was expected tosubstantially increase over the next few years, with China contributing muchof the growth. Building a refinery was an expensive task anywhere, thoughconstruction cost estimates were much lower for Asia. Ed questioned whetherthere was room for foreign competition or if it was a locals-only game.

Economics and Business Policy, Strategy and General Management

Sa Sa International: Growth Amidst AdversityStephen Ko, Kavita Sethi

Pioneering the discount store concept in cosmetic retailing in Hong Kong,Eleanor and Simon Kwok had succeeded in building Sa Sa into one of Asia'slargest cosmetic and beauty service retailers. The case enunciates Sa Sa's growthin the face of a host of environmental contretemps, including the Asian financialcrisis and the SARS pandemic. Escalating rents coupled with lower-than-expected tourism figures harbingered continual turbulence in its core market,Hong Kong. Under pressure to maintain margins, other causes of concern werecontinued losses from its operations in China, as well as the unsatisfactoryperformance of its beauty services division. Additionally, it appeared that SaSa was facing a positioning paradox - that of being a low cost retailer, stockinggoods from parallel imports, while trying to project the upmarket imagerequired by the global brands it stocked. Evaluating Sa Sa's current status,students can develop strategies that would enable Sa Sa's continued successand ability to compete in the changing retail environment.


Promoting Healthcare Tourism in IndiaBennett Yim, Amy Tang

A joint study by the Confederation of Indian Industries and McKinsey forecastedthe potential of healthcare tourism to amount to US$2.2 billion by 2010. TheIndian Government's growing awareness of this lucrative market led to a seriesof task forces and meetings to finalise decisions on how to develop the countryinto a major health destination. This case allows students to evaluate theindustry dynamics and competitive situation to come up with a proposedpositioning and targeting strategy for India to become a healthcare touristcentre.

Marketing, Strategy and General Management

AccuForm: Ethical Leadership and its Challenges in the Era ofGlobalizationAmy Lau, Raymond Wong, Claudia H L Woo

AccuForm is a German-Hong Kong joint venture specializing in the productionof chemical coatings for application on garments. Confronted with a situationwhere an unauthorized Chinese manufacturer had stolen one of AccuForm'sexperimental coatings, applied to their own brand of clothing, and sold to thepublic as an AccuForm product. The product had caused allergic reactions insome children and the media had widely reported the incident. It was laterdiscovered there were more to the situation than stolen coating, as some staffwere found to have engaged in money laundering, misappropriation of companyassets, acceptance of illegitimate rebates and bribes. The General Manager ofAccuForm, in addition to having to deal with the media, also had to find away to resolve the differences in business practices between the company'sGerman and Hong Kong parents, which are thought to have been partiallyresponsible for the incident, as well as rebuild staff morale and customers'confidence in AccuForm's products. This case illustrates how differences incompany cultures can create difficulty for management and what are formulaefor success in one country may be guarantee for failure in another.


KingJewels: Ethical Leadership in PracticeAmy Lau, Raymond Wong, Macy Wong

KingJewels, one of the leading jewelry manufacturing and trading companiesin Hong Kong, was having another profitable year. With its Operations Directoressentially running the company in Hong Kong while the owner and CEOfocused his energies on expanding the business into international markets, anopportunity had arisen for foul play. Accounting records had been manipulatedand some senior staff found to have forged shipping documents and acceptedbribes from suppliers in exchange for awarding of contracts. To complicatematters further, the professional and personal relationships between some keyplayers in the company were blurred, making it even more difficult for theeventual whistle-blower to decide her course of action. This case illustratesthe importance of corporate governance and internal control, even for SMEs,and especially when senior management members of the company concernedhad ties that extend beyond professional relationships


Las Vegas Sands Corp: Betting on GrowthFrederik Pretorius, Jeroen van den Berg

In May 2004, Las Vegas Sands Corp. became the first to open a Western-stylecasino in the Chinese enclave of Macau. Run and owned in majority by SheldonAdelson, Nevada based Las Vegas Sands Corp. had pioneered the convention-driven business model in the Las Vegas gaming industry. As one of three newgaming licence holders in Macau, Adelson was set to replicate the model inMacau and break the monopoly held by Stanley Ho's Sociedade de Turismoe Divers more than 40 years. By May 2005, Macau wasexperiencing construction frenzy. Billions of dollars worth of casinos, conventionvenues and hotels were under development. Las Vegas Sands Corp. was oneof the main instigators, with a US$1.8 billion casino resort under constructionas well as an interest in six hotel casino complexes. The company was alsoexpanding its Las Vegas business with a US$1.6 billion casino resort next toits existing Las Vegas Venetian development.

In this case, the student is asked to step into the shoes of an analyst and preparea valuation of Las Vegas Sands Corp. However, unlike a more traditionalvaluation of a company operating in an established industry, a valuation ofLas Vegas Sands Corp. cannot be based on its historical performance. Instead,students have to work with estimated future revenue streams of Las VegasSands' properties, many of which are still under construction.

Finance and Investments

A Publication of the ACRC Winter 2006

12

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Pearl River Piano: Hitting the Right Notes in the Global Market?Michael Enright, Emily Ho

China's status as an export powerhouse is changing from a focus on its low-wage and low-labour-cost advantage towards high-tech, high-value-addedexports. Pearl River Piano, a state-owned company in China, had been propelledfrom a slow-moving Chinese firm founded in the mid-1950s to a boomingglobal company with growing sales abroad and domestically. While it faredwell in the low-end product segment in the international market, there wasspeculation about whether Pearl River Piano could transform itself into a trulyglobal brand by ascending to the mid-high product segment and whether itcould achieve sustained growth by building a reputable and high-qualitybrand name in the West. Using Pearl River Piano as an example, this case studyexamines the internationalising strategies adopted by Chinese companies andanalyses the next step for Chinese brands going global.


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Biocon: From Generics Manufacturing to BiopharmaceuticalInnovationMichael Enright, Venkat Subramanian, Jeroen van den Berg

Incorporated in 1978 as a joint venture between Biocon Biochemicals Ltd,Ireland and a company led by Ms Kiran Mazumdar-Shaw, a young Indianentrepreneur, Biocon had long depended on revenues from the production ofenzymes and generic drugs. However, competitive pressure from within thecountry as well as from other developing economies like China was quicklyeroding price levels in these lines of business. Moreover, the 2005 adoption ofWTO TRIPS in India meant that that the generics-based strategy that manyof India's pharma and biotech companies had followed might not be viableanymore. To continue on its current growth path, Biocon needed to considermoving from being a producer of biogenerics to becoming a globalbiopharmaceutical innovator

This case is primarily concerned with strategy in an emerging industry. It alsosheds light on the effects of clusters on strategy, as well as the effects of nationaland supranational factors on strategy. Leadership issues and low-cost strategiesfor diversification are also addressed.


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