International Acquisition Strategy of Fosun Group (pp. 111-128)

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93UPSin India-A Package Deal?-~~-=---'

CASE 26 I UPS m India-A Package Deal? C413

it possible to overcome the numerous challenges that this highly regulated yet underdeveloped economy presented? Which global strategy should they apply? Could they

decentralize decision making and adopt a strategy that would make it easier to incorporate the diverse local conditions of India? Which segment would prove to be most profitable: business-to-business, consumer- to-consumer, or the emerging business-to-consumer channel? How quickly would the advent of the new "credit-card generation" change the scope of a-com- merce in the country? Once they decided what activities to pursue, what was the best means of accomplishing UPS's business objectives? Could they use their current strongholds to grow organically, or would additional alliances be a better way to go' Perhaps they should follow the model of DHL and pursue an acquisition instead. The dynamic business environment in India surely needed a dynamic strategy, and it was up to Ms. Pageto figure out how to proceed from here

Endnotes

1. Mirra, S. (2009), ;<Asurvey of Indian express delivery ser- vice providers," Indian Institute of Management Calcutta, May. 2. Berg, Eric N. (1985), "United Parcel extends its reach." The New York Times, June 9. 3. www.ups.com!contenUcorp/aboutihislory/1929.html. 4. Hess, E. D., and R. Kazanjian (2006), The search/or organic growth. Cambridge, UK: Cambridge University Press. 5. www.ups.comlcontentlcorp/aboutlhislory/1929.html.

6. "Company history; AboULUPS," UPS, com, www.ups.com/ conten tJcorpl abou t/history 11980 .hrml ?WT.s v1=5ubNav, 7. www.pressroom.ups.comlAbout+UPS/Company+History/. 8. www.ups.com/contentJcorp/aboutJhislory/198o.html. 9. "Company history; About UPS," UPS.COlli, www.ups.coml con ten tJcorp/a bou tJhistory 11990. hrml?WT,svI=SubNav, 10. Ibid. 11. "Teamsters end UPS strike," CNN.co1ll, www.cnn.com/ USI970S/20/ups.update.early/. 12. Leonhardt, D. (1999), "Returns to senders; Snail mail: It's alive! And it's mutating!" The New York Times, November 14, www.nytimes.coml19991l1l14/weekinreview/ I'elums-to-senders-snail-mail-it-s-alive-and-it+mutating. html "refeun ited_parcel_service_inc. 13. Hess, E. D., and R. Kazanjian (2006), "The search for organic growth." 14. www.ups.com/contenticorp/aboutlhistory/1999.html?WT. svl=SubNav. IS. Hess, E. D., and R. Kazanjian (2006), "The search for organic growth." 16. UPS Media Kit, www.underconsideration.com/speakup_ v'lJups_mcdi a_ki 1.pd f.

17. Hesseldahl, A. (2004), "Toshiba will have UPS fix its laptops," Forbes.com, www.forbes.com/2004/04127Icx_ ah_0427ups.html. 18. "Company history; About UPS," UPS.com, www.ups.ccm/ contem/corp/ about/history 12002.h trnl?WT.sv I=SubNav. 19. "The UPS store debuts more than 3.000 strong," The UPSStore.com Pressroom, www.theupsstore.com/about/press- roomlpagesl0407o3_press_release.aspx. 20. Hess, E. D., and R. Kazanjian (2006), "The search for organic growth." 21. "United Parcel Service," Wikipedia.org, hnp:11 en.wiki pedi a.orglwikilU ni!ed_Parcel~Service. 22. Hudson, S., "Success with hub and spoke distribution," Supply Chain Management, NCSU, htlp:llscm.ncsu.edu/pub- licllessonslJess031 0 la.hrml. 23. "Pedfix announces domestic express services in China," 2007 Press Releases, Fedex.com, http://fedex,com/cn_english! about/pressrel easesl200703 20_507, hrml. 24, "Company history; About UPS." UPS. com. www.ups.coml conteru/corp/about/history/. 25. UPS CEO Scott Davis in a 2009 CNBC interview, htrp:11 video.msn.coml?mkt=en~tls&brand=money&vid=372a9lb9" 1195-4a Ic-93aa-1 ad61 bd526e4&playlist=videoB y'Iagnag.mo neY_lop_investing:ns:MSNmoney _Gallery:mk:us:vs: I&from= MSNmoney_ticker&tab=s216. 26. PM's address to Joint Session of the DIET, Press Information Bureau (India), December 14,2006, www.pib.nic. inlrelease/release.asp?relid=233 I8. 27. Balogh. M., (2007). "Significant growth is crucial for India's economy," January 10, Credit Suisse, hup.r/emageztne. credit-suisse.comlapp/articlelindex.cfm?fuseacrion=OpenAnicl e&aoid=20021 o&lang=EN. 28. "India GOP growth rate." Tradingticonomics, July 5, 2010, www.tradingeconomics.com/&onomicslGDP-Growth. aspx?Symbol=INR. 29. "UPS snapshot for small businesses: Doing business in India," http://pressroom.ups.com/pressroomlstaticti.leslpdf/ faccshee~sllndia_SnapshotjocSmaILBusinesses.pd.f 30. Williamson, J" "The Rise of The Indian Economy," wwwunc.edu. May 11,2006, www.unc.edu/depts/diplornat/ item/2006/0406/will/williamson_india.html, 31. Sharma. A. (2009), "India's Foreign Trade Policy 2009-2014," November 2, The Metropolitan Corporate Counsel. www.metrocorpcounsel.comlcurrent. php?artType=view&EntryNo=10306. 32. ENAM Securities Logistics Update, March 2009. 33. "India information,' Embassy of India, www.indianem- bass y.org/i ndiainfo/indi a_i l.hun. 34. "Deregulation of oil prices-Yet another endeavor." lndiQlIesl, http://indiquest,wordpress.coml20D9/06130/ deregulation-of-oil-prices-yet~another-endeavor/, 35. "Transport in India," Wikipedia.org, http://en.wikipedia. org/wiki/Transport.jn.Jndia. 36. "Indian road network," Wikipedia.org, htrp:llen.wikipedia. orglwikillndian_Road_Network,

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C414 CASE 26 I UPS in India-A Package Deal?

37. "Rural roads-A lifeline for villages in India," World Bank Publication, hup:llweb.woridbank,orgIWBSITEJEXTERNAU COUNTRIESISOUTHASIAEXTIEXTSARREGTOPTRANSP ORTIO"contentM DK:21755700-pagePK :34004173-piPK :340 03707 -theS itePK :579598 ,OO.htmI. 38. "Kingfisher Red," Wikipedia.org, hup:llen.wikipedia,orgl

wild/Kingfisher_Red. 39. "Research for Aircargo India 2010," www.slauimes.coml aci2010f. 40. "Indian Railways Infonnalion System," www.indianrail. gov.in/ablr.hrml. 41. "India: Transport and communications," The EcO/wlIlist, June 24. 2008, www.eiu.comlindex. asp?layout=VWPrintVW3&aniclc_id=: 1I I3483696&prinlcr= printer&rf=O. 42. "Inland waterway transport," United Nations Economic and Social Commission for Asia and the Pacific, www.unescap.orgJudw/PublicationsffPTS_pubs/Pub_2307/ pub_2307 _ch II.pdf. 43. Peters, H. J., "India's growing conflict between trade and transport," Infrastructure and Urban Development Department, The World Bank, January 1990, www-wds. worldbank.orgJextemalldefaultlWDSContentServerllW3PI 16120001021241000009265 _3960929 I534371RenderetVPDFI multi_page.pdf. 44. www.tciLcomlpdfiifrffCILar09J>9_07_09.pdf. 45. HesseldahL A. (2004), "Toshiba will have UPS fix its laptops." 46. Cygnus Business Consulting and Research Pvr Limited, Quarterly Performance ArUllysis of Companies tlanuary- March 2009), Indian Logistics Industry. 47. "Value added lax." Wikipedia.org, hup:llen.wikipedia.org! wikiNalue_added_tax.

48. WWW.lciI.ComlpdfiifrffCLLar09_09_07_09.pdf. 49. Markoff, J. (2005), "Plan to connect rural India to the lruemet," The New York Times, June 16, www.nytimes. cornl2005106/161technoIOgy/l6compute.html. 50. "FirSI of its kind, one-stop retail outlet offers full range of business services to North India," press release, UPS.com, www.ups.comlcontentli n/enJabou tlnews/press_ releases/new - delhi_ups_store.htrnl. 51. peters, H. J., "India's growing conflict between trade and transport," January 1990. 52. "UPS increases FSL presence in China," POSl and Parcel, hltp:llpostandparcel.infO/30941/marketsl ups-increases- fsl-presence-i n-china/. 53. Home page, Alibaba.com, http://news.alibaba.comJspe- cials/aboutalibabalindex.html. 54. "UPS teams with AIiExpress," AtlanTa Business Chronicle, May 3, 2010, http://atlanta.bizjournals.comlatlantalsto- riesl20 I01051031d,i Iy23 .htrnl. 55. "PosLaju and UPS form alliance, The New York Times, July 5, 2010, http://markets.on.nytimes.comJresearchistOCkS/ news/press_release.asp ?docTag=20 I006031 OOOBIZWIRE_ USPRX_6W5289&feedID"600&presuymbOl"277628. 56. Mitra, S. (2009), "A survey of Indian express delivery ser- vice providers." 57. "Fast-growing Indian express market set for further con- solidation," press release, CEP Research, https:llwww.cep- research.comlexportlsites/defaultlCepresearchlpages/customl pressfllease_articleslPL 06-09- 21-CEP -Research. pdf. 58. These facts were collected in an author's interview with logistics industry expert, Supratem Ganguly. 59. Mitra, S. (2009), "A survey of Indian express delivery ser- vice providers." 60. "India together," www.indiatogether.org/20061augllaw- poffice.htm .

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INTERNATIONAL ACQUISITION STRATEGY OF FORUM GROUP 111

International Acquisition Strategy of'Fosun Group 313-135-1

International Acquisition Strategy of Fosun Group:

Innovation or Pragmatism?

This case was prepared by WU Min and CHEN Chen, students 0/ EM-Lyon, instructed by Prof Dong Sian, EM-Lyon Business Schoof. If is intended/or class discussion rather than illustrate either effective or ineffective in business administration.

Copyright © 2013 by EM-Lyon Business School. No part cf thls publication may be reproduced, stored in a retrieval system, or transmitted in anyform or by any means-electronic, mechanical, photocopying, recording or otherwise-without the permission of EM-Lyon Business School.

ethe case for learning DIJlllbul.d by K(h, IlK.nd USA_w.•~ch.comAllrlghlS .. "NedPrinted in UK.nd USA NorIh Am.rltaI +1 781 239 S8B4, +1 781 239588S_ I!CthUi~,CO", 1\_" oIlh_ worldI +44 (0)1234 75O'J1O]f +4410)1234 7S Ins_ =hOKth.com

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International Acquisition Strategy of Fosun Group

Introduction

On 13th June 2010. Garden Hotel, Shanghai, under the witness of dozens ofjoumalists, regrouped the key figures of Fosun, the biggest Chinese private conglomerate: Mr GUO Guangcbang, the president- founder, Mr LIANG Xinjun, the co-Founder, Mr.QIAN Jianlong, director of au on investments, Mr CHANG Chuu, VP of Forte (Fosun's filial in real estate). Face to them were seated the superior management team of Club Med, the synonym for holiday resorts for 60 years in the Francophone world. This team was led by a man in his fifties, with a sharp sight and a determined face, the President-CEO of Club Med, Mr Henri Giscard D'Estaing. People can hardly ignore this rare surnamc, which comes from his father the ex-President of the Republic of France: Valery Giscard d'Estaing.

Relaxing smiles took over the solemn ambience in the hall as an intensive bilateral negotiation had just finished with a satisfying outcome for both. In the mean while the news announced in an earlier press meeting was circulating among the wcll~informed financial obselVcrs all over the world: Fosun and Club Med agreed to set up a strategic partnership. Concretely, Fosun would acquire 7.1 % stake of Club Med with 20 million euros (220 million RMB), making it the biggest shareholder of Club Med. Club Med finally found a pillar for its ambitious expansion plans in China - FOSUll promised to be a long- term investor and to help Club Med to rollout its roadmap in this New World full of opportunities.

This transaction, despite of its moderate amount regarding to the scale of either Fosun or Club Med, it marks a mile stone for both companies. On one hand, FOSUll has been seeking for an entry point for its internationalization roadmap since quite a long time. The crisis in 2008-2009 brought down dramatically the share prices of many old-brand enterprises around the world and released opportunities for companies from emerging countries, especially for those who have as much cash as desire,like Fosun. On the other hand, as a part of its struggle for surviving, Club Med has fixed its strategy "Focus on China" since 2009 and has decided to work with a strong local partner to implement this strategy. This decision was largely piloted by Mr Henri Giscard d'Estaing himself and based on his cognition from a long political career. Understanding how important and how precious it is, in China, the local connections and relationships, be prefers being led by an experienced sailor which can guide him to navigate in the deep ocean of Chinese market and to find big fishes. Moreover, his experience as CEO of'Evian, filial of Dan one Group, with both success and failure in the joint venture with a Chinese company Wahaha, taught him that it is crucial to find not simply a partner, but the RIGHT one.

Following this successful beginning, FOSUll seems accelerates its steps in international investment: investing in Folli Follie, a Greekjewelry and retail group; creating an investment fund together with Carlyle; setting up tbe partnership with Prudential, a US insurance company, etc.

This international marriage so-far-so-good, will it have a happy ending? Or it will result in bitter pill for both (not rare in similar cases)? In a wider prospect, will it be the prelude for tbe epic of'Fosun's internationalization? Could it become one of'the rare successful models of overseas acquisition for Chinese private company? Or it will tum out to be a pure capital investment, like many others done by new moneys from emerging economies?

No doubt. that all these questions flashed upon the minds of all the attendants presented in Garden Hotel that evening. However, no one was able to give an answer with certitude by then In the '0110· rtFthi b . . . II wmg pa a .t us usm~ss case, we invite you to join Fosun's adventure of intemationalization by acquisition and WIll share WIth you our personal witness and analysis

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313-135-1 lnternntional Acquisition Strategy of Fosun Group

I. Macro economy background: Global crisis bougbt opportunities to Chinese investors

To understand the timing that Fcsun chose to launch its adventure ofintematicnalizaricn, let's review the global economic environment dominated by the consequences of'the financial crisis started in 2008.

1. From financial crisis to economic recession

The financial crisis of2008·2009 was detonated by the rupture of the real estate bubble in the U.S. High level of default on subprime mortgages led to tremendous loss on mortgage-backed securities (MBS). Major global financial institutions and investors, having heavily invested on MBS were obliged to report significant write-downs. As a result, transactions among financial institutions stilled down and loans 10 key businesses were tightened,

Facing to the crisis, the Central bank of U.S. (FED) provided rescues to key financial institutions and launched stimulus programs to encourage lending and restore confidence. However, the bankrupt of certain financial institutions, resulted in a total panic of the financial market. Hence, none of the above measures could stop the financial crisis from affecting seriously the real economy. Because of the accelerating effect, the credit crunch slowed down business development of many companies facing difficulties to finance their productive activities. The GOP growth rates of main economies decreased significantly while their unemployment rates sharply increased (c. f. the following graphs). The global economy has been experiencing the biggest recession cycle after the Second World War.

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Sources ofOate: wwwJMF.com

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2. The chute in principal stock markets all over the world

Due 10 this global economy volatility. coupled with recent European debt crisis. the global stock markets have been unprecedcntedly underperfoOlling, Under this aunosphere, since the beginning of the crisis, the stock prices of a majority of companies have sharply fallen down, including those of giant multinational corporations. As a result, from manufacturing to retail, from banking to services, many intemationnl corporations and brands have been undervalued and some of them arc even in

difficulties to survive.

Above situation means good opportunities for companies with available cash to expand via buying quality assets at low prices. As the lending emerging economy and stimulated by a tremendous monetary expansion in 2008-2009, there is no reason for China to be absent from this grand banquet.

"The situation has been reversed." said Ralph Jaeger, a senior research consultant for the investment consultancy firm Cambridge Associates. "Years ago, Chinese companies were cheaper. Today you have to go outside China lO find acquisitions at reasonable price."

As the pressure of the global financial meltdown IntensifIed, the major European and US. stock Indexes feu rapidly, moving In lock step.

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Date source: www.bloomberg.com

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3. The economic situation in China

In the last two decades, China's economy has emerged as a major player in the world economy. China's rapid GDP growth has changed the distribution of economlc activities across the planet It surpassed Japan to become the second biggest economy in the world in 2009, and it seems to be only a matter of time for it to surpass the United States. China's exports have lowered down consumer prices across the globe, and its imports have begun to have a major impact Oil global commodity prices.

In 2008-2009, the fall of demand from oversea market reduced China's export and slowed down China's growth only during a few months at the beginning of the crisis. Backed by a colossal reserve of foreign currency (No, I in the world), Chinese government had the means to quickly enlarge the country's domestic demand by an unprecedented expansion of the public dispense (the famous project of4 trillion RMB). With this method, as a rare exception in the world, China has been able to maintain an economic growth outstandingly high despite of tile affects from the global financial crisis and sovereign debt crisis in Europe

4. Chinese com pantes accelerate their internationalization by acquisition

The growth of the country's GOP brings ambitions and capabilities for Chinese companies to expand overseas, while investors from other countries, suffering from huge write-downs during the crisis, were in general eager for recapitalizations. This contrast provided Chinese companies a net advantage to enter in the "auction" of attractive foreign assets as well as a larger flexibility in the negotiations. lu this context, Chinese companies, either state-owned or private ones, have stepped onto the global stage, with an expanding portfolio of international mergers and acquisitions. This tendency was shown statistically by a sharp increase on the outbound foreign direct investment from China (it posted USD 56.5 billion in 2009, accounting for 5, I% of all over the world, and the amount in 2010 recorded a historical high ofUSD 59.3 billion.)

The IT hardware provider Lenovo (acquired the Laptop BU of IBM in 2004), the metallurgic giant Chinalco (search for acquiring carbon miner allover the world), China National Petroleum Corp, and the Industrial and Commercial Bank of China are just some examples of tile Chinese companies that have expanded overseas in recent years. According to a JP Morgan research report, the transaction amount with China as the acquirer in the first halfof2010 ranked second largest in the world, only behind the US. The milestone transactions in 2010 included CNOOC's acquisition of Pan American Energy, Geely's acquisition of Volvo, Shanghai Electrics' acquisition ofGoss as well as Wenzhou Chenglong's acquisition of Pierre Cardin. We can see that these transactions not only involve quality international assets and well perceived brands, but also the absolute control of the business

5. The motivations of the Chinese acquirers

We try to summarize in three aspects the principal factors which could have driven these behaviors:

A. Sufficient capital for overseas investment

The Chinese economic has been growing at an average annual rate of aim os I 10% since it embraced the economic reforms in early 80s. The 30 years' prosperity in continue has accumulated huge capital in China. As a proof, the total capital raised in China through Shenzheu, Shanghai and Hong Kong stock exchanges amounting to USDI30 billion in 2010, exceed that ofNYSE Euronext (USD 34 billion). In terms of total capital raised through the capital market in 20 I0, Chinese companies ranked No.1, followed by the USA and Japan.

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Intcmaucnnl '\Cqllj~lljl)tl Strategy ofFostlll Group

B. Advantageous monetary context

Outside China, RMB was maintaining the trend of appreciation against major currencies. Due to the Quantitative Easing policy driven by the Federal Reserve, USD kept depreciating against RMB, and commodity prices were likely to go up as long as usa remains the underlying currency. In the mean time, the uncertainty of the public finance problems of the Pl1GS and the European debt crisis increased the volatility of Euro and would affect its strength against RMB. And the huge public debt in

Japan would lead to a long-term depreciation of'Yen against RMB.

Meanwhile, inside China, RMB is under a kind of depreciation. The real purchasing power of RMB in the domestic market has been decreasing during the last few years, as the inflation rate remains high. The dramatic burst of'housing prices implies further inflations of the investment products.

The continuous appreciation of RMB coupled with the domestic inflation provides a further discount of overseas assets, already undervalued due to the global economic environment.

C. 1n search 0 f global resources

Since more than a decade, more and more Chinese companies have begun to look on global markets for access to resources, customers, intellectual properties and advanced technologies. However, they have been also facing a plenty of challenges in terms of culture, human resource, financial reporting and legal issues on their attempts for internationalization (not always successful).

Now, with the change on global trend and favorable internal and external factors, the Chinese companies are more likely than ever to put acquisition in the centre of their internationalization strategy, as it is the best (or the only) way for them to bypass the above mentioned challenges.

6. International acquisitions - a real adventure

Despite all above favorable elements, and while specialists consider that it is a good timing, international acquisition is still an action ro be carried out with great caution.

According to statistics compiled by Accenture, from January 2008 to June 2010, Chinese companies injected over 600 billion RMB (US$90.6 billion) for about 120 overseas mergers and acquisitions, but not all ofthe deals were successful. Because of cultural differences and lack of market information many Chinese companies have suffered important loss in overseas acquisitions, '

Among all Chinese acquirers, the State-owned enterprises with sufficient funds seem to be the main force. Traditionally, these companies prefer ensuring their control on the acquired company with more than 50% of stake. However, they are more often example for failures than for success, sometimes due to.th.eir background .and va~ious political reasons. As an example, the Aluminum Corporation of China L1I11lted(Chalco) failed to mcrease its capital share in Rio Tinto.

The re~ulation regarding theoantitruS~ is another ~lajor reason for failure. For example, Shougang Group s attempt to buy 19.9Vo stake m Mount Gibson Iron Ltd was rejected because ofth ' ,. e cppostucn from the Australian government.

Some otl~er M&As are sluggish because it took too longtime to merge the two companies. For example effort to integrate the Lenovo Group and (8M arc still underway even though L k '. enovo too over IBM's personal computer division in 2005.

ln all, there is still a lot for Chinese companies to learn in overseas acquisiti d iI Ions an mvesrments.

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INTERNATIONAL ACQUISITION STRATEGY OF fORUM GROUP :'--~"""IoC-'"

International Acquisition Strategy of Fosun Group 313-135-1

II. FOSUN - A typical example of Chinese private company rising in the past two decades

I. A brief summery of Fosun's history

The year 1992 witnessed a historic breakthrough in the economy reform in China since 1978. Being encouraged by Deng Xiaoping's Shenzhen speech during his famous tour in the Southern China, a big quantity ofvelhe", i.e. officers from the Party or the government, professors from universities and managers from state-owned companies, decided to quit their post and to create their own companies. GUO Guangchang belongs to this group or adveruurers, later referred as the "92 Fraction".

In 1992, GUO Guangchang, majored in philosophy, gave up his dream or studymg in the US and founded Fosun together with three schoolmates, using his personal saving of 4000$ originally prepared for his study plan. The name Fosun stands for "Star of Fudan University", reflecting the entrepreneurial passion of these four Fudan University graduates.

The majority of the "92-Fraction" started their business relying on the state-owned enterprises or the public establishments where they worked. However, Fosun founders sailed out immediately after their graduation with their own "treasure" - a better education background as well as a global vision. Fosun achieved a rapid development by acutely identifying the tendency of China's development and investing in fast-growing domains at different stage (pharmacy, real estate, mining etc.).

Early 90s, Fosun earned its first pot of gold in pharmaceutics. In 1994, Fosun launched its real estate business Forte Land. Soon after, it sailed out also in pharmaceutical distribution by creating the chain pharmacy store - Fosun Pharma. Around the year 2000, Fosun started its adventure as investor by a serial of strategic investments: Shanghai Friendship Group (retail) in 2000. Si Yuyuan Group (retail and commercial real estate) in 2002, Jianlong Group (iron and steel) in 2002. These successful attempts encouraged Fosun to accelerate its steps: NISCO (Iron & Steel), Zhaojin (mining), Tebon Securities (finance), Yong'an (insurance), Focus (media) .

Nowadays Fosnn has become the largest privately-owned conglomerate, with approximately 30,000 employees based in all the provinces as well as offices in Shanghai, Hong Kong and New York (dedicated for international investment). Within 20 years, they succeeded in turning from an industry enterprise to a diversified industry group, then to an investment-oriented corporation.

Along with the development of Fosun, Guo and his team noticed the importance of the capital market. The growing Chinese stock market and the opening of oversea stock markets to Chinese enterprises provided precious opportunities of leverage for Fosun's rapid expansion. Fosun Phanna, the pharmaceuticals business has been listed on Shanghai Stock Exchange since 1998. In 2004, Forte Land, the property business was listed on the Hong Kong Stock Exchange (HKSE), followed by Fosun International, the holding company in 2008).

With these successful capital market fundraising, Mr. Guo and his team have to keep searching for new growth engines for Fosun, following the unique investment strategy of Fosun - always focus on China's growth momentum.

2. Fosun's businesses mainly concentrated in 5 domains:

A. Pharmaceuticals and Healthcare

The pharmaceuticals and healthcare department of Fosun is involved in .the research, dev~lopm~nt, manufacture distribution and retail of pharmaceutical products for medical treatment ofliver; diabetes, cardiovascular and tuberculosis diseases; and in the provision of health care services, including supply chain, retail and other services.

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lntcrnanonul Acquisition Stralc~y of FOSUll Group

Fosun operates in this sector mainly through its filial Fosun Pharma, a Shanghai~listed company. , focused on modem bio-hcallhcare industry. In addition, Fosun engages in the development ot China s premium healthcare service industry by investing in Chindex International Inc.

B. Real Estate

The company's property segment engages in the development and sale of urban complex projects, including hotels, commercial spaces, and apartments, as well as provides real estate fund management, property circulation and consultation and sales agency services,

Fosun operates in property domain through its 3 major subsidiaries: Forte Land, a n~tionwide property developer listed on the Hong Kong Stock Exchange; Resource Property, a Shanghai-centered integrated service provider of property circulation industry; and Zhenda, a regional Real Estate developer founded in 1993, focus 011 Shanghai.

C. Industrial

Fosun holds important shares in producers (Nanjing Iron & Steel and Jianlong Group) of steel plates, steel bars, wire rods, steel strips, structural section steel, medium wide hot and cold strips, hot-rolled coils, bars and wire rods.

D. Natural Resources

Fosun is involved in the mining and are processing of various resources, including iron are, coking coal and gold. The Group operates in this sector through its 6 subsidiaries: Hainan Mining, owner of the largest open-pit iron ore in China; Jin' An Mining; Huaxia Mining; Shanjiaowulin; Zunyi Shiji Nonerrous Metal and Zhaojin Mining.

E. Retail, Services and Other Investments

This segment comprises the management of investments principally in retail and services industries.

The Group operates in the retail business through its principal associate, Shanghai Yuyuan, a listed company on the Shanghai Stock Exchange, which operates in the tourism industry and in the retail chain of gold and jewellery.

Fosun also o~erates ~ the service indus~ry lh~OUg~lits participations in Focus Media, the largest outd.oor ~edla ~dvertls~ment c01~pany 1I1 China; In Club Med, a renowned world resort operator; in Felli Fcllie, an international fashion brand; in Yong'An Insurance, a property and casualty insurance company.

Being very active in both public and private markets, the Group applies a golden criterion in its investing engagements - participating in the activities which benefit the most from China's growth momentum.

3. Key management team

The founders and senior management team assure Fcsun's rapid development Lthei, c.r. CIT general background below:

Mr. GUO Guangchang, 45 years old, having B.A. in Philosophy as well as a MBA ofF d U· . e d f F . I .. u an mverstry tcun cr 0 osun, IS t ie executive Director and Chairman of the '" 'group smce Its establishment in 1992.

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lnremational Acquisition Strategy ofFosun Group 313-135-1

His title includes also, Director of Fosun Pharma, Director of Nanjing Iron, non-executive Director of Forte Land and Director of Club Med since March 20 II.

Mr. LIANG Xinjun, 45 years old, co- founder of the group, Vice Chaim1311, Chief Executive Officer and Executive Director at Fosun since 2009 after being the Vice Chairman and the Vice President at POSUll since its establishment. He serves as a Director at Yuyuan, a Non-Executive Director at Zhaojin Mining and an independent Director at Shanghai Oriental Pearl. Mr. Liang has a bachelor's degree in genetic engineering in 1991 from Fudan University and a master's degree in business administration in 2007 from Cheung Kong Graduate School of Business.

Mr. FAN Wei, 43 years old, co-founder of the group, has been an Executive Director and Co-President at Fosun since 2010. He has been lite Executive Director and CEO at Forte since 1998. In 2009 he resigned from the post of CEO and was appointed as the Chairman at Forte. Mr. Fan has a bachelor's degree in genetic engineering from Fudan University.

Mr. WANG Qunbin, 43 years old, co-founder and a Director at FOSUll Group since its establishment. He began as a Director and the General Manager of Fosun Phanna (and its predecessor Shanghai Fosun Industrial) since its establishment, then the Chairman at Fosun Pharma since 2007. He also has been a Non-Executive Director at Sinopharm since 2003. He has been appointed as the President and Executive Director at Fosun International since 2009. Before joining Fosun, he was a lecturer at the Genetic Research Institute of Fudan Univ. with a bachelor's degree in genetic engineering from Fudan Univ. in 1991.

Mr.Q1AN Jiannong, 50 years old, has joined Fosun since 20 I 0 and nominated as GM of To uris III and Commercial Group. After a brilliant study in the University of Duisburg of Germany resulted in Master and Doctor degrees in economy, he gained rich experience in retails and consumer business. He worked as the president-CEO ofNepstar Chain Drugstore and helped the company list in NYSE. He is the key person who conducted aJl the international investments of Fosun.

4. The preparation of Fosun for its internationalization

Before launching its global investment, Fosun had already defined its own roadmap of internationalization. In an interview, WANG Qunbin disclosed that, long time ago, the internationalization had aJready been raised as an option among the co-founders. But they decide to focus on domestic market firs! and to accumulate necessary resources, as their expertise and know-how were quite local. While waiting for a right moment to take action for internationalization, they managed to transform Fosun from an industry company to an investment-oriented corporation. This effort will be particularly useful for Fosun's international acquisition later on.

Apparently, in 20 I0, Fosun consider the time is coming: both external environment and internal preparations seemed to be mature. They need to just identify best quality-price assets and catch the opportunities.

Before the attempts as an investor, Fosun carried out a long campaign to gain the recognition of its own company among the international investment society. This campaign last till Fosun's listing on HKSE in 2007. During this period, Mr. Guo hired experts to teach him about the way of thinking and the business culture in the western world.

At the same time, the founders ofFosun make use of the Chinese culture as a key to promote the image of the company on a worldwide stage. In 20 I0, Mr. Guo ~ave a Kung-Fu perfor:nance in a.silk Tai-Chi dress during a dinner with Fosun's international contacts III New York, so as to Illustrate his plan to introduce Fosun into the world business world "with grace". "We are doing a Tat-Chi show in New York, and the next stage will be in Germany ... We want Chinese culture to go abroad. That's why we

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120 International Business Strategy' _

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lmcmational Acquisition Strategy of Fosun Group

nsoring an exhibition of Forbidden City's are opening Tal-Chi training schools overseas and we are spo f h -fbunders ofFosun. collections in the Louvre museum" explained Wang Qunbin, one 0 t e co

L11. The tirst step of Fosun's internationalization

I. Club Med -An Old French Coach looking forward to accelerating ill new world

Club Med is a world-class premium resort operator, with 80 resorts located in famous tourist destinations and 1.3 million loyal members around the world. The club was the pioneer of'the all- inclusive holiday package (stay, B&F, activities, kid take-care all included), who has introduce~ as . early as the 50's this creative business model nowadays well-known to the whole world. Especially, In the Francophone communities, the mode of Club Med has marked in the memories several generations of people and influenced their vision on holidays and resorts. As a symbol, the word Club Med became a sort of synonym to family vacations.

The club, founded in 1950 in France by fbrrner Belgian water polo champion, Gerard Blitz, started its activity as a non-profit association organizing holiday excursions with the slogan "bring the happiness to people". It received all overwhelming welcome from the European vacationers thanks to its convenient all-inclusive holiday package and a delightful ambiance. The association was transformed to a company in 1956 and was listed in Paris in 1966. With decades of development, its resorts already evolved from simple unlit straw huts on a beachfront to upscale integrated villages with comfortable rooms, suites and completed facilities. It expanded very quickly in 1970s and the number of its resorts achieved once more than 140 in 19805.

In the 1990s, the Club's profit declined as the competitors around world copied its concepts and holidaymakers demanded more sophisticated offerings. From Serge Trigano to Philippe Bourguignon, the two successive CEOs failed to renin) the situation and Club Med fell deeply into loss in the downturn following the September 11,2001 attacks in the USA.

In 2002 a new CEO, Henri Giscard d'Estaing, was appointed. The new CEO announced the new strategy -refbcusing on holiday villages for high-end vacationers. For financial aspect the Club should shift its.poli.cy from O\~ning all its resorts to simply operating them. Following these decisions, almost half'ofits Villages, winch were low end and had no possibility to upgrade, were closed or sold. And the Club started renting luxury villas and chalets. With this measure, the resort performance has been in improvement, which allowed the Club to return 10 profit in 2005.

However, the financial crisis in 2008 interrupted Club Med's dream of'vren ' "dd I. . . . . alssance ,Sll en y bringing the Club m big difficulty to find take-over for its burden assets Id 'II d

. - 0 VI ages non-a apted for renovanon. As a result, the sale of asset was almost stagnant while di , , E. " . Ismlssmg uropean staffs cost a huge amount. The snuauon ISworsened as its traditional markets (rich f 'I' , W . . ' lanll les In estern Europe and III America), deeply touched by the crisis had the tendency to cut th ' b d flei ,

..' err u get o leisure/holidays By Apr 20 I0, even with net Improvements on operation performa b . . turned to red and share price dropped to 9.0 euros the lowest .nc~ rCUtlmg COSt,"" annual profit still 2007. ' III 1 S ustory, regarding to 57 euros in

Against this background, Henri Giscard d'Estaing launched "Chi lila strategy" in 2009 fi 'the development focus of Club Med will be moved to Chi .pre tgurmg thatmao

This decision was also driven by under the booming to' ket i. unsm mar et m Chin tl k ' Chinese economy during the past two decades. As early as 2003 Clu alan s to rapid growth of

, b Med already set up its first sales 10/18

........._------------....;...------

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______ INTERNATIONAL ACQUISITION STRATEGY OF FORUM GROUP 121"'..,-_-----------------.:=::~:.:.::.:::..:::.::~~==.::::..:..==~_l'--.L6.JL...J

International Acquisition Strategy of Fosun Group 313-135-1

office in Shanghai and started cooperating with Chinese travel agency 10 bring Chinese clients to its oversea resorts. In 2009, Chinese in-bound tourism visitors have achieved 1.9 billion and out-bound visitors summed up over 40 million. The total tourism revenue has achieved IOOOmillion RMB. Among them, 29000 guests chose Club Med as their destination.

The opening in 20 10 ofits first resort in China in the ski town of Yabuli marked a mile stone for the "Focus on China" strategy of Club Med. As a result, the number of its Chinese customers soared 40% year-on-year that winter.

Encouraged by this success, Club Med sailed out with an ambitious plan 1.0 open no less than 5 new resorts in China within 5 years, and to recruit more than 20 000 members by 20 I5, making China its second biggest market (after France) in the world. To achieve this objective, Club Med understood that it is absolutely mandatory to have a strategic partner in China. As a symbol of its sincerity, Club Med was willing to open its capital to this new partner so as to ensure an effective and committed partnership.

2. The deal

In 2010, Club Med was introduced to FOSWlby Capital A, a French boutique investing bank. TIle two companies Fell in love at the first sight and quickly agreed to set up the strategic partnership. Based 011 an agreement of strategic cooperation, the capital investment was concluded at a flash speed, after only 2 months' intensive discussion. On June 13th 2010, Fcsun acquired a 7. 1% stake with 20 million euros (220M RMB) making it the biggest shareholder of Club Med. Fosuu promised to be a long-term strategic investor as a pillar of Club Med's expansion plans and to help it accelerate the rollout of its concept in China.

As part of the deal, Fosun pledged not to lift it's stake beyond 10 percent ifit reached that level, at least during the following 24 months, subject to DOother shareholder having or wishing to acquire more than 10 percent. FOSUllhas the right to send a board member to Club Med and a second one if ever its share amount 9%. In addition, Fosun will have one representative in both the strategy committee and the audit committee of Club Med.

For the reason explained in the previous section, the principal expectation of Club Med on this marriage is of course a kind of financial partnership with Fosun or its real-estate filial Forte as, for example, the village owner in new resort developments. Besides financial support, Club Med expects Fosun's local input regarding resort development, human resources, media and communications. The global business synergy would be realized in several aspects, as an example, Club Med could benefit from Fosun's advantage in its multi-industry investment. We will see the details of such benefit later in section 111.3.810.

For Fcsun, it's also a good opportunity to increase its international exposure and to gain the multi- cultural experience. In this sense, the deal brought more than what Fosun expected. FOSW1,being quite discreet till then, gain a fame and reputation in Europe in a flick overnight. The president GUO and the CEO LlANG, were invited for interviews on world top medias such as Wall Street, Financial times, TFI, Figaro etc. "Fosun will not only support Club Med's global strategy of upscale positioning and sharing China's growth opportunities," deployed GUO Guangchang in the joint-communique with Club Med in the press meeting, "but also use this opportunity to benchmark itself with international brands and standards in order to improve its ability to consolidate resources and manage investments."

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313-135-1

lntemanonal Acquisition Strlltcp,\' of'Fosun Group

3. Synergy

The two companies carried out series ofmeasures to realize an efficient synergy in order to both

benefit from this strategic partnership.

As a top-level design, a mix-committee regroups key members to orga~ize regular meetings a,t d~fferent levels. The high-management-leveJ meeting fixes objectives, makes guidelines, sets. up the principals while the executive-level meeting reviews the cooperation regularly and ensures dally communIcation.

To facilitate the bilateral communication, Fosun recruited a French-speaking Chinese and Club Med accelerated its Chinese-speaking stntTrecfuitment.

This attempt is helped by Fosun's continuous effort to improve the company culture building and internal communication among its different subsidiaries and invested partners. Fosun launched a . campaign named "Fosun _ one family" to unite more than 100 companies with Fosnn investment. WIth the help of this platform, Fosun invited Club Med to all kinds of activities. A bilingual magazine, Fosun Express, is published every month to share latest news ofFosun with the partners.

We may summarize the essential parts of their cooperation in following aspects:

A. Resort Development:

As the major part of the strategic partnership with Club Med, Fosun will help Club Med to achieve it development goal- identify and develop 5 new resorts in China. Club Med confirmed its interest in certain destinations or in certain projects. Since 20 10, Club Med, as a new comer comparing to Starwood, Accor, lNG, quickly created its pipeline of new resort development and planned to deliver one new resort by year, This success is unimaginable without Fosun's support: an expertise in real estate development, a strong financing power as well as a close connection with the local authorities and business partners.

In the same time, Fosun is also paying close attention on Club Med's overseas real estate assets and managed to get to know potential international partners though connections of Club Med.

B. Media & PR

As we've mentioned in section 11.1, Fosun holds important shares in the media industry: own 100% the publisher of the Chinese edition of Forbes magazine, 40% of 21st Century Media, 17,2% of Focus Media, th~ last one being the biggest n~w media in China with coverage of300 million people. With these media groups as brother companies, Club Med could easily improve its visibility in China.

Moreover, the deal itself brought many opportunities of exposure to both companies too. It has been presented as a.s~ccessful case. in.a 45-minute "International acquisition" program ofCCTV2 (China C~ntral Television). Meanwhile It attracts attention from mainstream oversea Medias such as Financial TImes, Wall Street, TFI, FIgaro etc. .

C. Sales

Fosun itself has a huge budget every year on conferencing and employee incentive do i I , I' dlinked s.eo co rts partners

supp rers, C rents an In e governmental institutions. Through these connections CI b M d' ' Id h

e I . . I 1I e 5 resorts cou t ererore lave opportumues to enter the massive MICE (Meetings Incentive C f . d Exhibitions) market in China. ' s, on erencmg an

D. Human Resources

Fosun and Club Mcd share their resources in HR. At basic level Club Med' ffs i C . regularly various training programs provided by Fosun But the 'cooper t s.sta Sin hma benefit. a Ion IS much more than that:

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International Acquisition Strategy of Fosun Group 313-135-1

While Club Med buill-up the staff team for Yabuli, its first village in China, it chose 40 young talents among the former volunteers for the Shanghai World Expo (20 I0) already recruited by Fosun; Club Med',s ,long head-hunting campaign for chiefs of Chinese cooking in villages was also accomplished by recrumng from the candidates recommended by Yuyuan (c.f section 11.2.E), the partnerofFosun running many Shanghai restaurants.

Fosun staffs dialog weekly, sometimes daily, with their counterparts at Club Med. "We share with them our development plans for China. And we ask them for their point of view and if they know people, investors or operators who can help us build a resort in that location" explained Henri Discard d'Estaing in a press meeting held in New York early 2012.

rv. The Establishment of Fosun's Strategy on international acquisition

I. Fosum acceleration of internationalization

Encouraged by the successful experience in the strategic partnership with Club Med, Fosun seemed to be more and more confident all its strategy and capacity in international acquisition and expedited the proceedings:

Also in 20 I0, Fosun teamed up with the Carlyle Group to launch a 50-50 joint venture fund focused on high-growth companies with a "business nexus to China."

As a case similar with that of Club Med, Felli Follte, the Greek jewelry and luxury goods retailer group also tries to knock at the door of Chinese market. Being well-known in Europe, Felli Follie is however a late comer comparing to other luxury brands which has already expanded their market share in China since a decade or even longer. Their struggle alone for a piece of cake in the tremendous market would definitely be a hard one because of the barrier and the cost to get into distribution channels. Naturally, Folli Follie became another target of Fosun. In May 20 I I. Fosun acquired 9.5% of its stakes with more than 84 million euros ($120 million).

In September 20 II, Fosun Group got the regulatory approval to create a joint venture insurer with U.S. financial service company Prudential Financial Inc. It fanned a $600 million private equity fund in January 2012 to invest in Chinese companies listed overseas as well as foreign firms with operations in China. The new portfolio, called Pramerica-Fosun China Opportunity Fund. will put Guo's strategy into test Mark B. Grier, the vice chairman of Prudential based in the US said that they chose Fosun as partner because of the conglomerate's intimate knowledge on Chinese market and government. He also pointed out the opportunity for Fosun to make use of its existing portfolio to support the development of the new investments. For example, he suggested that one of Fosun's holdings, Shanghai Forte Land, a major property developer in China, could benefit from retail investments.

Fosun becomes a top choice for US private equity flrms looking for joint ventures in China. "Such partnerships are considered crucial for foreign players, in part to navigate the fraud in the marketplace and the regulatory hurdles", said Shaun Rein, the managing director of China Market Research Group, a consultancy firm based in Shanghai.

As a most recent move, Fosun hired the former U.S. Treasury Secretary John Snow as an advisor for developing networks in the North America.

2. Elaboration of rrosun's international acquisition strategy by Fosun's founders

So far, Fosun's roadmap ofinteruationalization is rolled out with clearer version. In the annual meeting of Fosun in 20 II Fosun chose "Global resources combining Chinese market" as its main focus. During the meeting the four co-founders reviewed the two iutemational acquisitions (Club Med and Folie Folie) in tl1; past two years and gave a speech to encourage the whole enterprise to be ready for further international investment and internationalization of the group.

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Internauounl vcquisuiou Strategy of Fosun Group

In an interview with Financial Times, GUO outlined the plan for an extended international acquisition. which could involve B wide range of brands and businesses that need Fosun's help to development their business in China. "Virtually any foreign company in any industry, listed or unlisted, could be a target, as long as it fits with Fosun's strategy, 'linking China's growth momentum and the world's resources to create a strong combination" he said. "Fosun is not only interested in luxury fashion brands", he emphasized. "Chinese consumption is growing fast in a1lsubdivisions, from high-end to low-end," "Low-end food and clothing have big growth potential in China - KFC is a good example of that," he analyzed, "We will focus on areas we are already familiar with - for example, pharmaceuticals, fashion and tourism." . WANG Qunbin, another co-founder also emphasized in the same interview "one oflhe most important criteria for FOSUllto invest overseas is that the target company should have its future growth mainly from China."

Fosun CEO and Vice-Chairman Liang Xinjun disclosed in an interview with Caijing News (One of biggest financial media in China) thai Warren Buffett is most likely to be Fosun's model, transitioning from an industry group to an investment group. "Mr Buffett focuses on investment skills and I always keep one of his quotes in my mind," he told the Financial Times, citing an aphorism by Benjamin Graham, Mr Buffett's mentor _"In the short term, the stock market behaves like a voting machine - bUI in the long tenu, it acts like a weighing machine." "When we're thinking about investing in a company, we won't watch its stock's short-term fluctuation. We feel that a company's long-term value is the more important factor." For Liang, "long term" means "at least 5 years, 10 years or even 20 years" for Fosun.

"Fosun has only bought small stakes in foreign firms", also said Liang Xinjuu. He hoped to overcome the mistrust in Europe and in North America towards Chinese investors. The minority stake investments in Club Med in 2010 and Folli Follie in 2011 are the good demonstration oftbe strategy.

Fosun's international acquisition hinges on its full-fledged industrial base, financial and operating capabilities to support its investments at all stages. Based on its strong resources and broad expertise in Chinese market, Fosun helps occidental companies to set up and develop their businesses in China.

Their investment strategy remains conservative, with a value-based investment orientation and a focus on trusted partners. It seeks proactively investment opportunities arising from the refocusing of China's economic from export to domestic demand, from China's progress of urbanization and industrialization, as well as from the structural changes of the global economy. Its unique investing model, "combining China's growth momenmrn with global resources", reinforces its position as a China expert with global capacity.

In 20 11, Club Med's global revenue increased by 5.2% with profitability turn-around and would open its second resort in China the next year with the help ofFosun. In2011, Folli Follie increased significantly the number of its stores in China while its global revenue and net profit increased by 5.1% and 4.7% for the first 2 quarters respectively.

A~parentlY, the investment carried out by Fosun has achieved positive results so far. This positive sign Will no doubt encourage Fosun to speed lip its further steps of internationalization under the strate f international acquisition. gy 0

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INTERNATIONAL ACQUISITION STRATEGY OF FORUM GROUP

lntemational Acquisition Strategy of Fosun Group 313-135-1

Annex I: Club Mcd's share holding before Fosun's acquisition

-,.,.- ""NUmIHlr-of .~ \/ot'ng "tlllW rfu~Q'.lwh VOlI"Cl dQrrtt A131Qc:t20oa. , lU310n:lOll8 , ,1,131 cer 2OD9 , .. 1)1 Oc1. 2009

Flplr lnemolioo .... lIC.ine de Oepolo!et ':!,081,140 10.1 2,081,140 ,,. :ta31.nl ". 2,1531,n.l ..•cleo ~uon _""..roe)...~ $09,517 ... 909,517 ee 1,2lU,111 e.s I.U4,HI ..•

ell!ldll "'tlricole , 115517 .. 1,115,511 " ToUIl 8()llt'lj olOl1Ktm 4.923078 :15,4 4,923,078 24.7 521' 519 '" 5,211,519 182 NipponUle 169,131 • 7611,731 , .s 760,131 " 169,131 "AIrFnillICeFirotnce 387.1150 , 387,160 '.' $16,21. " 511:1,214 ,.GLG ~.rtners LP 2,306,19$ 11.9 2,30£!,796 11.6 ~,"'1S.6DO e c 2,215,600 "A<_ 1,162,630 • 1.1~,630 s.e RJdllIije u Finance 1,liS,ne s.e 1,468,456 ,.• 618,221> a a lltD,228 ,.. KBC 1,230,880 " 1,23O,6l!0 " B""'" as 611e,SlIO ,.•S .. "....,lJ:Inna kmnd l\J:l 907,252 ... 907.252 '5 Fren.JII ... ~I<Ao~ 2,626.017 135- 2.6&ll,3S6 ,,. .,5991111 18.3 ~,658,617 ", foreign inllltilUMl"" 3,8S6.2113 le,1I 3,9'u,ellfl ". 4961 ~21 '" 9,Il:?O,M1 ,,.n.UUljl'1llC_ lU,a37 ,. 274,631 ... 2$$,394 0.' 25!>,311~ OS E"lployefl 25,6111 0.' 25,691 0.' 29],)) .. 2&,333 "' P""car>llolWlr 1.n~.Tt3 e.s 1,164,3>12 " ~~.. eo.952 '" ~,~1l,2~5 15.$

l&1'I1Ol! 19,:H7,9CS "'" 1Q,919.~56 "" 21!11~$l.'llllll "0 21!6M 561 "",I Source: Fosun's internal report

Annex 2: Fosun's corporate structure

Source: www.Fosun.com

15/18

125

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126 International Business Strategy

lntcmntional Acquisition Strategv of fosun Group

313-135-1

Annex J: Fosun's shareholding

Fosun Holdings 79.08%

Companies=====ill Dimentional Fund Vanguard Blackrock Guoqi Ding lnvescc Fldeuram Gestions Ping Wu Alliva John Hancock Invest Xuelang Oln Delaware Management Interfund Advisory Remaing shares

Other 20,92%

'.iNm,1 0,12% 0.91% 0.26% 0.20% 0.16% 0,13% 0.12% 0.10% 0.08% 0.06% 0,05% 0.05% 18.80%

Yil of Others

Fosun (HK656) is owned as to 79.08% by Fosun International Holdings with the rest of the share being held mainly by the public.Tben, Fosun International Holdings is owned as to 58%, 22%,10% and 10% by Guo Guangchang, Liang Xinjun, Wang Qunbin and Fan Wei, respectively

Source: Markctline

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INTERNATIONAL ACQUISITION STRATEGY OF FORUM GROUP 127

313-135-1 International Acquisition Strategy of FOSUll Group

Annex 4: Fosun's key flnanclals

profit iEI: Lou Rmbmn 2009 2010 2011 2012£, 20131 RWfnu@ 34,S.s6 ..,..... 56,.316 51,'i) S7r:!H Gro5J prdlt 5,694- 9,357 10,566 10,82' 12,3G9

DPpredatioo 1.94.6: .,8S7 2,149 ',5" 2,914 EBIT 2~467 6.319 7..... 6,J65 7,576 Net interest e:qJ'i'nS(I (1,100) (1,571) (',3<U) (',711) (2,Ml As.sodate:s a jeE'S 97. 926 I.S71 I,Jl] 1,9+9

POT 8,176 B,6B 0,881 ',J71 6,aJ'3 eeepucnet 3.S'~ Z,~13 911 0 0 T'" (1.'57) (~.~1) (1.0'8) (1.080) (2,167 Mloortty (2,172) (1,910) (1."') (1,543) (1.0.>8

Net pn:Al. (R.pomd) 4,647 ""Z27 l,404 2,348 2,)H No, pn:Al' (C",") I,"'" 1,604 2."'72. l,3't6 2.,747

EPS (R@DCft~dl 0.'24 0.6s.B 0.530 {U66 0 ....2&

Source: Fosun's annual report (20 11)

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128 International Business Strategy

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jmcrnatiotml \cquisiliotl Strategy of Fosun Group

Annex S: Fosun's major Rcquisition and partners since 2008

FO(1IS' Mti!dill Hold.,g Fason tfltamational BCqUif'e!> addl1JOnllli .take in Acqui5ition '0 _22,

l~ited (Chine) Focus Medl. fiolding 2011

Fosun Inlemlitlonal to .cquire 95% '5b1b in A"""""" ,,, May06,

Fa"l Fole 5.A. (Germany) Foltl Follie 2D11

Shanghai FOfte Larw:l Co., Ltd. (Hong KOrlll ~ .. F05un Intemation.1 to acqlJire ShWlgtlai Forte AcquisiUDn

Jan 20, sea

Adrrllnl5ln1li\lt Regia" of L~' 2011 Ctwul)

PrudentiaJ Insurance Pruden1i.1 Fin.aAtrial receIvH approval from 0<104,

Cornp~y or A.n'Ienc8 Chine InllU13nl;:e Regulatory Commission to partr\oet$l1lp 78

:W'O

(United SlaWs) form joIInl W1ntulV W1itr Fosun GJ'O\lP

Chongqing lar'llilFu sn..ngl'la~ Forte Investment MenaUemenl ftJ Aug 1S1.

p~rtv ComPllnv Limited MlQtjR tlO,,"ltake in Chon~ LanQFu Acquisition .. 2010

(China) Pmpert)' Company

Club Meditf!II.. ne. SA snal'toh.lfOSlJnHlahrectmmMv~!i Acqui!roon Jun 11,

(Franee-) 1.~% smllieln Club MellitM'anM :W'0

Anhul Ji"nhuangzhuang Nanilnll kvn & SIMI .OO.lOnWB'lMilli~ GftMlg U.y1S,

MinIng cc.. Ltd. (China) )l) acquire 50" stake in Anhui Jinhuangzhuang AcqWlticn 31 2010........

ShltflQl'w Fosun Shangtwli Fosun Pharmaoeubca1 raises $95 OD Private MlIY04, PhsrmaoelJlicallGroug)

.. ce., lid (China)

mtU;on thrOlJGh pri.., ... pIece~t Placement 2010

ShangtuM CkBngguang Shanghai Forie In~Htment lMaMgttment to Invastment Management ~"'10D~ stake in Ctulngguantllrwe-slmem Aaqutiltian 4B

ApJ14.

Co.. lid, (China) Man~1 2010

ShlMlCllla:l FoM Zhlbao Fort- Investment to aaqulf'a rerulnll'lJl 25'" Real Estlile Co., Ud AcqlJisltil:ln

AUQ27. SllUte in Shanghaj Forie Ztw!J8o RNI E!itfte

,.. 2.00

(Chln8)

FOCllS Madia Hakli1g Fosun Intarnstlonalecquires 13.3% stake in Dea22.

United (Chin.) Focus Media Haldi"G Acquisition '''' 2008

Source: Marketline

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..--._------------ -

EMERGING MARKET STRATEGY OF TOYOTA

313-294-1

lCMR las Canter for Management Relearch WWWicmti!idiO-Orij

ISSCenter for Management Research

Emerging Market Strategy of Toyota

This case was wn"tten by Bamall Chokraborly. under the direction of Oebapratlm Purkayostha. IBS Hyderabad. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

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Emerging Market Strategy of Toyota

In July 2013, Yasumori lhara Ohara), Executive Vice President of Toyota Motor Corporation was readying plans to bolster Toyota's position in the emerging markets by expanding operations into Cambodia, Myanmar, and Kenya. According to Ihara, who was in charge of the company's emerging markets business, "Compared with North America, Europe, or Japan, where buyers are mostly replacement buyers, it's mostly first-time buyers in emerging markets. It's where the future growth is."] The Japan-based Toyota was the world's largest automaker with a presence in more than 170 countries. In March 2011, Toyota announced its 'Global Vision' in which emerging markets were given particular importance as part of its strategy. The company wanted to get 50% of its global sales from the rapidly growing emerging markets by 2015. The company considered China, Southeast Asia, India, and Brazil as its key emerging markets. In 2012, Toyota's consolidated vehicle sales was 8.7 million units, out of which 3.7 million were sold in emerging countries.

But in the second half of 20 13, Toyota was facing intense competition from its rivals both in the developed as well as the emerging markets. The company had invested a huge amount in emerging markets, but key emerging markets were facing a lot of volatility and sluggish growth. There were concerns that these markets were no longer attractive enough. In addition to getting Toyota's emerging markets strategy right, Ihara's main responsibility was (0 reverse the disastrous sales decline in China, where consumers were boycotting Japanese-built cars due to diplomatic tensions over some disputed islands.'

ABOUT TOYOTA

Toyota was founded by Kiichiro Toyoda in ]937. In subsequent decades the company took the automobile industry by storm by coming up with its famed Toyota Production System which enabled the company to come out with many innovative models in a cost-efficient way. The company started its globalization in the 1950s and entered the US market in 1957. It established its first overseas production unit in Brazil in 1959. It entered the European market in 1963. Besides manufacturing, the company started a global network of design and R&D facilities covering the three ~ajo.r car markets of Japan, North America, and Europe. The company underwent rapid expansion 111 the 1960s and 1970s and exported fuel-efficient small cars to many foreign markets.

The Corolla, which went on sale in 1966. became Japan's most popular family car. By 1974 Corolla had ?ecome the largest selling car in the world, and a decade later, Toyota ranked second only to GM 10 the total number of ears produced, By the end of the 1980s, Toyota began building new brands and the luxury division, Lexus, was launched.

After some setbacks in the early 1990s, the company began to grow further bv f ', 'I" . Y locusmg on 1I1ternatlOn~expansion and locahz~tion of production. In 1999, besides increasing the number of ma~ufactunng centers and expanding sales networks worldwide, Toyota focused on localizing design, deve~opm~nt, and purchasing in every country. Toyota propagated the Toyota Production System and Its uruque corporate culture. 'The Toyota Way' throughout its glob I ' 'units. -, a manuractunng

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During the 2000s, Toyota registered strong sales in the US and Japan. In 2001, the company started two new plants in Europe and in 2002 it established a plant in Turkey to manufacture Corolla sedans for export markets. In April 2002, Toyota announced a new corporate strategy '20 I0 Global Vision' to achieve a 15% market share of the global automobile market by early 2010. By rnid~2003, Toyota had a presence in almost all the major segments of the automobile market that included small cars, luxury sedans, full-sized pickup trucks, SUVs, small trucks, and crossover vehicles. In the first quarter of 2007, Toyota replaced OM as the world's leading automaker, breaking the latter's 77-year reign. Based on market capitalization, Toyota was valued at almost 12 times OM's value.

On June 23, 2009, when Akio Toyoda (Akio), the grandson of Toyota's founder, took over as President of the Japanese automaker, the company was facing some serious problems. In mid- 2009, the company reported its first losses since 1963 due to the global financial crisis. Akio immediately announced some measures to bring the company back to profits like adopting the traditional Toyota practice 'genchi genbutsuto' (onsite, hands-on experience) to solve problems. In January 2010, Toyota was forced to recall millions of cars after some problems were found with the braking, floor mats, and acceleration pedals in its vehicles. The company even had to stop sales and production of eight of its most popular models. To address the issue, in March 2010, Toyota established a Special Committee for Global Quality to carefully investigate the cause behind the problems and re-examine all of Toyota's processes, including design, production, sales, and service.

In the fiscal year ended March 31, 2012, Toyota suffered the double impact of the Oreat East Japan earthquake and the Thailand floods. These natural calamities affected its supply chain and resulted in reduced output. Moreover, a stronger Yen during this period led to lower revenues and profits for the company. Toyota's net revenue in the fiscal 2012, fell by by 2.2% compared to the previous fiscal. However, in the fiscal 2013, Toyota sold 8,871 thousand vehicles on a consolidated basis compared to 7,435 thousand vehicles the previous year (See Exhibit I). Toyota's net revenues in fiscal 2013, was JP¥22,064.1 billion and net income attributable to Toyota was IP¥962.1 billion (See Exhibit II).

Toyota had three business segments - automotive operations, financial services operations, and all other operations. Toyota's subsidiary, Daihatsu Motor was involved in producing and selling mini-vehicles and compact cars. Another subsidiary of Toyota, Hino Motors, produced and sold commercial vehicles such as trucks and buses. Toyota's vehicles could be classified into two categories: hybrid vehicles and conventional engine vehicles. Toyota's product included subcompact and compact cars, mini-vehicles, mid-size, luxury, sports, and specialty cars, recreational and sport-utility vehicles, pickup trucks, minivans, trucks, and buses. Toyota's primary market was North America, which accounted for 27.8% of its total automobile sales; its domestic market, Japan, accounted for 25.7% followed by Asia (19%), other markets (18.5%), and Europe (9%).

THE EMERGING MARKET OPPORTUNlTY

The global automotive market was highly competitive and competition was likely to intensify further with continuing globalization. The factors affecting competition included product quality and features, safety, reliability, fuel economy, the amount of time required for innovation and development, pricing, customer service, and financing terms.

With growing economies and a low vehicle penetration rate, emerging markets were considered as the key source of growth for the global automobile industry. According to the International Monetary Fund, between 1988 and 2011, while the developed markets' of global GDP declined from 61% to 49%' emerging markets' share increased from 21% to 39%.3 In the early 2000s, the manufacturing lan'dscape of the global automob.ile industry started. s?ifting toward the eme~ging markets (See Exhibit Ill). The reason behind this change was the nsmg demand from the middle income group in these countries. The growing middle class population was expected to fuel

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consumption and thus demand. According to estimates of Brooking Institution, while the US and Europe's share of tile world's middle class would decline from around S?% in 2013 to 22% by 2030 Asia's share would increase from 30% to 64% during the same period. Moreover, the low prod~ction cost in emerging countries also helped the automob,iJe compa~ies. to shift their production base to these countries. Asia's share of global automobile ~roductlOn ,1I1creased f~om 15~20% in 2002 to more than 50% in 2013.4 The top three car producmg countries were China, South Korea, and India. According to a study by CSM Worldwide, during 2008-20 IS, more than 50% of growth in global light vehicle production was expected to come from China and South America.' "Rather than setting up duplicate production bases, OEMs [Original Equipment Makers] are increasingly seeking to gain efficiencies and scale by establishing a production base in the most efficient place where they can minimize cost and maximize revenue,,,6 said Bill Russo, Senior Adviser, Booz & Company. In 2013, Ernst & Young forecast that emerging markets would drive car export growth in the UK. According to its report, China would become the UK's leading trading partner with total automotive export to China growing by 12% by 2017. Thailand would also become an important destination for auto export with total export predicted to more than double by 2017.

In 2012, China overtook the US as the world's biggest car market with sales of 19.3 million vehicles compared to 14.5 million in the US. China's dominance was expected to continue as it had a low vehicle penetration rate of 85 vehicles per 1000 people while it was 797 vehicles in the US.S By 2030, China's annual sales were expected to reach 39 million, which would be 28% of global sales." Apart from China, lndia was expected to become a key pillar in the global automotive market. According to an estimate by Booz & Company, by 2015, Lndiawould become the fourth largest automotive market by volume. It was also projected that by 2020, passenger vehicle sales in India could exceed 6 million units annually." Other key emerging markets were Russia, Brazil, and the ASEAN I countries. The BRIe countries (Brazil, Russia, India and China) were projected to become four of the six top markets in vehicle sales by 2030." Though there was a slowdown of growth in the emerging markets in 2013, global automakers were optimistic about the long term growth prospect. While in Brazil, automobile sales were projected 10decline by 2% in 2013, in India, auto sales were down by 6-7%. However, it was projected that in Brazil, sales would grow by 1% in 2014 and in India by 7%? In China, automobile sales were projected to grow at a CAGR of around 8.2% during 2013-2017.13 "Emerging markets are multiplying. Now you have Indonesia, Burma, Africa. Maybe one will slow down, [but] the overall picture of emerging markets justifies every investment we have done. We have to do more,"] said Carlos Ghosn, CEO, Renault and Nissan,

TOYOTA'S STRATEGY IN EMERGING MARKETS

Toyota's .presence in the emerging markets dated back to the 1960s when it used to sell vehicles in market~ ~l~eTaiwan, Brazil, South Africa, Thailand, the Philippines, Malaysia, Russia, and China. In the 1I1ltlal.years, .~~yot.a was ':I0stly export.ing vehicles from Japan to these countries as it only had pr~duct1on ~acliities Il1 B.razJ1,~outh Afr~c~,~nd Thailand. During the 19705, Toyota started producing multipurpose vehicles III the Philippines and Indonesia as families in these two countries tended to be large and therefore vehicles that c?uld be used both for business and family ~ere prere~re?, In 1976, Toyota launched the Tamaraw Il1 the Philippines followed by the Kijang In Indonesia Il1 1977. In the 1980s, Toyota started producing vehicles in Taiwan a d MI' followed by India in the 19905. By the 2000s, Toyota had production facilities ~n al~ ~~Sla emergmg markets (See Exhibit IV). esc

1 ASEAN countries comprised of Indonesia Malays' t1 PhT· S Myanmar, Cambodia, Laos, and Viemam.' 18, ie I ippmes, ingapore, Thailand, Brunei,

EMERGING MARKET STRATEGY OF TOYOTA

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In March 2011, Akio announced the 'Toyota Global Vision'. Unlike in the past, the vision was prepared based on deliberations with Toyota's teams from different regions of the world, and prepared in English. The slogan of the Global Vision was "Rewarded with a smile by exceeding your expectations". The company used a tree metaphor focusing on the roots, trunk, and fruit to express how the Global Vision was to be operationalized (See Exhibit V). A key aspect of the new strategy was to actively engage in emerging markets with the goal of shifting the ratio of global sales in industrialized nations and emerging countries from 6:4 in 20 Ia to 5:5 by 2015.15

Subsequently in March 2013, Akio reorganized Toyota across four segments and reshuffled the top management. This enabled a greater focus on emerging markets. Ihara, a Toyota veteran, who was brought back from retirement when Akio was appointed the President in 2009, was made responsible for the emerging markets business."

!hara (61) had a bachelor's degree in law from Kyoto University. He had joined Toyota in 1975 and had risen through the ranks. In January 1999, he was appointed GM of the Engineering Support Team for Overseas Suppliers (ESTO), Purchasing Planning Division. In subsequent years, he held genera] management positions in Toyota's Global Purchasing Planning Division and Business Development Division. In June 2004, he was appointed to the position of managing officer. In June 2007, he became president of Toyota Transportation Co., Ltd., and was made an advisor of Toyota. In June 2009, he was rehired by Toyota as senior managing director (a title that was changed to senior managing officer in June 2011). In June 2013, Ihara was made an executive vice president and a member of the board. 17

EXPANDING PRODUCTION IN EMERGING MARKETS

In an effort to increase its presence in the emerging markets, Toyota began strengthening its supply system in the emerging markets and increasing localization. During the 2000s, the company set up a local parts distribution network and a supply chain to provide greater autonomy to affiliates in the emerging markets.

Toyota's presence in South East Asia dated back to the 1950s. By 2012, Toyota had 14 production companies in Thailand, Indonesia, the Philippines, Malaysia, and other Southeast Asian countries. Under the Innovative International MUlti-purpose Vehicle (IMV) project launched in 2004, Thailand and Indonesia became Toyota's global production centers. By 2012, Toyota was the market leader in Thailand, Indonesia, the Philippines, Taiwan, Brunei, and Vietnam. IS

Over the years, as Thailand became South East Asia's biggest car market, Toyota also started expanding its manufacturing capacities in the country. By 2012, Toyota Motor Thailand (TMT) had three manufacturing facilities -, the Samrong plant, the Ban Pho plant, and the Gateway plant _ with an annual capacity of 230,000 units, 220,000 units, and 220,000 units respectively. To promote Thailand as the company's regional and global production hub, TMT announced that it would invest 12 billion baht (US$386 million) in 2013 on building a second plant at the Gateway industrial park to produce environmentally friendly vehicles. The plant was expected to increase the company's annual capacity at the industrial park to 300,000 vehicles annually from 220,000.19

ln Thailand, the company intended to increase its production capacity to 1.2 million units annually by 2018 by investing a total ofUS$700 million."

Toyota Motor Manufacturing Indonesia (TMMIN) had a manufacturing plant in Karawang, West Java, with total capacity of 110,000 units and also had 1\VO plants in Sunter, North Jakarta - one to build engines and the other for stamping parts. In March 2013, TMMlN opened its second manufacturing plant in Karawang at an investment of US$340 rruluon." The plant was to be used to manufacture the Etios Va/co in the initial phase. "With the commissioning of Indonesia's second plant in Karawang, production is estimated to reach 180,000 units by the end of this year, and 250,000 by the end of 20 14,,,22said a principal consultant at Frost & Sullivan. Indonesia was

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increasingly become a leading automotive market in Southeast Asia with car sales increasing by 25% to 1.\2 million units in 2012.23 In 2012, Toyota had a 37% market share in Indonesia and with this investment the company aimed to strengthen its position further. "We also plan to develop Indonesia as an auto export base. OUf Karawang plants have become indispensable to the future growth of global Toyota,,,24 said Takahiro lwese, Toyota's Senior Managing Officer.

Toyota Kirloskar Motor (TKM), Toyota's subsidiary in India, had two manufacturing facilities on the outskirts of Bangalore. In February 2013, Toyota opened a new plant in India at a cost of USS100 million. This increased the company's capacity in India by 50% to 310,000 units." "We arc in a mode of consolidation (in India). We have a fairly widespread dealer network and our capacity right now is climbing to 310,000 vehicles - we are currently at about 210,000 vehicles. Our first target is to make sure we produce that kind of volume by the end of 2014,',26 said the Deputy Managing Director of TKM. The new plant was to be used mainly to manufacture the Etios and tnnova models and a gasoline engine and transmission plant. In 2013, Toyota had almost doubled its market share in India to 6% and it aimed to capture 10% of the Indian car market by 2015 mainly by sel1ing the Ettos models." "The local production of the engine and transmissions for Etios raises the localization ratio to over 90%,,,28 said TKM's Vice Chairman.

Toyota do Brasil Ltda. (TDB) had three manufacturing facilities in Sorocaba, Sao Bernardo, and lndaiatuba with an annual capacity of 70,000 units yach in the Sorocaba and Indaiatuba plants." The Sao Bernardo plant built parts for the Corolla and Hllux brands. Toyota planned to open its fourth plant in Brazil by 2015 at an investment of US$SOO million. The new plant would have an annual capacity of 200,000 units. 3D While Toyota had been present in China since the 1970s, it began facing trouble in the country in September 2012. There were nationwide protests against Japanese companies after Japan moved to purchase a group of disputed islands." Toyota's China sales in December 2012 dropped 16% to 90,800, bringing annual sales down to 840,500 vehicles, 4.9% Jess than in 2011.32 Toyota, which already had three plants in China, decided to postpone construction of a new plant in Tianjin and Guangzhou. The two plants were expected to raise Toyota's production capacity in China by 40% to 1.3 million units.33

With the expansion of production sites in the emerging markets, Toyota's production capacity in these markets increased from 540,000 vehicles in 2000 to 2.38 million vehicles in 2010 and was expected to reach approximately 3.1 million vehicles in 2013, the same level of production capacity as in Japan".

PUSHING SALES IN EMERGING MARKETS

Tlte IMV Project The [MV Project was intended to create an efficient production and distribution structure for pick- ~p truc~ and mu~tipurpose vehicles to meet the needs of consumers globally. Toyota applied the ge~cJlI genbllf~ll approach. to observe and analyze the needs of each region and the types of vehicles us.ed l~ those .regl~ns to. develop and introduce IMVs. The lMV project included ~nanufact~~In~ diesel engl~es In Thailand, gasoline engines in Indonesia, and manual transmissions In the Philippines and India. The JMV project adopted a leaner development process based on a comn~on platform, a~d developed five. vehicles: three pickup trucks, a minivan, and an SUV, especially developed In 2004 for launch mover 140 countries (See Exhibit VI).

From mid-2004, Toyota started selling the vehicles developed LInder the [MY P . t lik h '/.1 u· . k k i Thai .. rojec ixe t e r. lUX riga pte -up true in ailand available m standard cab extra cab and do bl b d I .th / ... I d . " u e ca me e s; e nnova nuruven tn n onesia, and the Fortuner SUV in Thailand followed b th Phi I· .

M I . I di Ar . d S .. y e , rppmes,

a aysra, n ra, gentma, an outh Africa tn 2005 According to Akio th IMY· ,h . h . , . , c project was' a new c apter In t e history of Toyota ... and in the history of the world automobile industry.'?"

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In an effort to localize manufacturing, Toyota adopted the 'Made by Toyota' concept which aimed at global quality assurance whereby the company undertook to maintain the same high level of quality irrespective of where the vehicle was made. Toyota also started thorough after sales service programs for IMVs to gain consumer's trust. According to Akio, uLMV's success indicated that both customers and the market acknowledged the 'made by Toyota' concept.':" In 2011, IMV sales reached 770,000 units and as of March 2012, cumulative IMV sales volume touched 5 million (See Exhibit VU). By 2012, the IMV series of vehicles was being manufactured in 12 affiliates in emerging markets, and sold in 170 countries. Asia contributed 48% of the total [MV sales, followed by the Middle East, Africa, and Central/South America (See Exhibit VIII)

Based on the success of the IMV project, Toyota started launching global JMV models exclusively designed for emerging markets, such as introducing the Euos, its first subcompact model, in December 20 IOta meet local needs in India. The company applied its expertise from the IMV project to develop the Elias sedan. The Enos was developed over a five-year period by a team predominantly composed of Indian engineers based on opinions taken from Indian consumers. The Etios development t.eam collected data from the Indian market to identify and understand the features that customers looked for. The Euos was put through rigorous tests in various road conditions in India to ensure that the vehicle performed well in all parts of India. "Toyota has started to introduce models for emerging markets and that should be a core part of their mid-term strategy. The old strategy of taking a hit model from the US or Japan to emerging markets is expected to change.?" said Satoru Takada, an analyst at Tokyo-based TrW Jnc.

Toyota began marketing the Elias as a product tailored to the needs of emerging markets and available at an affordable price. In June 2011, TKM also launched the Etios Liva hatchback models. By November 20 II, the company had sold over 40,000 units of the Elias sedan and the Elias Liva. In April 2012, Toyota launched the Etios in South Africa as well. By May 2012, total sales of the Elias in India crossed 100,000 units. The car was modified and introduced in Brazil in September 2012. In March 2013, Toyota launched the Elias Volco, a 1.2 litre petrol hatchback in Indonesia. The Enos Va/co (originally launched as the Etios Liva in India) was imported to Indonesia in the form of CKD (Complete Knock-Down) kits and assembled by Toyota Indonesia. While in the short term, Toyota planned to sell the Elios Valco in the local market, it would also export it to other emerging countries depending on the demand."

Global Supply Base ami Increasing Localization.

Toyota also promoted the process of global izing production and supply through the IMV project. The company planned to shift from small scale production at II companies to large-scale production at four global supply bases in Thailand, Indonesia, Argentina, and South Africa.

The IMV project also aimed at 100% local procurement of vehicle components, rather than procurement from Japan. The company aimed to develop a globally optimized procurement structure for parts. In mid-2004, when Toyota had launched the [MV series vehicles in Thailand and Indonesia, 95% of vehicle content was from non-Japanese sources."

Subcompact and Hybrid Vehicle Strategy Toyota aimed to focus on developing subcompact vehicles that would meet the needs of consumers in emerging markets. The company aimed to launch eight such models based on the Enos platform, and expected to achieve sales of more than one million subcompacts in more than 100 countries and regions in emerging markets like Brazil, China, India, and Southeast Asia by 2015.40 According to Toyota's Managing Officer Kazuhiro Kobayashi, "[The cars] will slot "below the Corolla and will have a size similar to the Etios. The Etios platform naturally will be made good use of. ...'.41 The company also announced that it would manufacture the subcompacts mainly in Brazil, China, and India with 100% local procurement of the car components so that they

42could be produced at low cost.

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In September 2012, Toyota announced that it would launch a turbocharged gasoline-engine car an~ an electric car specifically for emerging markets after 2014.43 The company also announced that It would introduce 21 new hybrid models by the end of 201544 either by developing new models or by completely changing its conventional hybrid models so as to continue to dominate t~e global hybrid market. Toyota pioneered the green car market when it started selling its fi~st hyb.nd ~odel, the Prius also the world's first commercial hybrid car, in 1997. "It shows Toyota ISstaking Its bets in the next 5-10 years that hybrids are going to be the key to market share.?" said Stuart Pearson, analyst at Morgan Stanley." Toyota aimed to develop different hybrid models for the emerging markets as the m~in components of hybrid vehicles such as the battery, motor, and control system needed special technologies to operate and repair, which made the models expensive. Therefore, Toyota aimed to launch an eco-friendly vehicle with a turbocharged gasoline engine in emerging markets. A turbocharger could add the horsepower needed in a gasoline-powered car to improve fuel efficiency. Moreover, turbocharged gasoline engine cars could be mass-produced easily,

In 2011, Toyota's emerging market sales ratio reached 45% from 35% in 2008 (See Exhibit IX). "In emerging markets we will serve growth in demand by fortifying our locally produced core models, including the Innovative International Multipurpose Vehicle [IMV] models and newly developed subcompact models, ..41 said Akio while announcing Toyota's Global Vision. The company also aimed to position its high-end Lexus models extensively in emerging markets.

48 In

2011, Toyota announced that it would officially introduce its Lexus model in India by 2013 through the fully imported route."

COMPETITION

Though Toyota was still the # 1 automaker in mid-2013, its position was coming under threat from a resurgent OM and Ford in the US market. Competition was catching up in the hybrid car market too. In its home market, the company was hit hard in late 2012, after government incentives for consumers to buy fuel-efficient models expired.so In 2013, the Yen declined more than 12% against the dollar. In emerging markets, Toyota had to contend with intense competition from other Japanese companies such as Nissan, Honda, and Suzuki, some of which had managed to entrench themselves in key emerging markets. Companies such as GM and Germany-based Volkwagen were also pushing ahead with their own emerging strategies. In 2012, Volkswagen became the most profitable automaker in the world with an operating income of EIl.S billion (US$15 billion)." The company had announced plans to invest €1 O.3billion (US$13.6 billion) to expand production in China between 2011 and 2015.52 In 2012, Volkswagen had an 18% market share in China, 22% in Brazil, 9% in Russia, and below 5% in India." Though Toyota was the largest player in Thailand and Indonesia, in China, it had been pushed to the fifth position behind GM, Volkswagen, Nissen, and Hyundai."

South-Korea-based Hyundai was the second largest automaker in India as of 20 12 behind Suzuki which enjoyed a dominant position. Honda too announced its aim to get half of its sales from emerging markets by 2017.5s In an effort to achieve this target, in August 2013, Honda announced that It would double its production capacity in Brazil by opening its second plant in the c try

. h an i f B blllion." ounWit an Investment 0 RL I lilian. Honda also announced that it would boost productio . h . . h C' ion tn

at er emerging cou~tfles suc as hina, India, Thailand, Indonesia, and Mexico. The Franco- JapaneseRenault-Nlss~n Alliance too invested US$2.5 billion to boost sales in India. "Japanese automakers used to enjoy great advantages over Korean U S and even Ge kers i. ' .., rman carma 'ers In many markets,' but the rivals h~ve been.cat~hing up quickly and the gap is at a minimum now. It's really. not g~mg to be that SImple this tlme,,,51 said Yuuki Sakurai, president of Ja an-b d Fukoku Capital Management Inc, P ase

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VOLATILITY IN EMERGING MARKETS

In 2008 and 2009, analysts were expecting emerging markets to become a safe haven for investors, considering the recession in the US and Europe post the global financial crisis. But as of 2013, while developed economies seemed to be strengthening, the emerging markets had underperformed in the previous couple of years. Analysts were also concerned about the vulnerability of the emerging markets which reacted strongly to modest changes in the world economy. In mid-20 13, many emerging markets were struggling with rapid depreciation of their currencies. Countries such as Brazil, India, South Africa, and Indonesia were among the worst affected." Between May and September of 2013, while the Indian Rupee fell by 21%, the Brazilian Real fell by 17%, followed by the Indonesian Rupiah (J 5%), the Thailand Baht (8%), and the Russian Ruble (6%). S9 Central banks in key markets like Brazil and India were working frantically to prop up their currencies. 60

According to the estimates of the OECD, the US would grow by 1.7% in 2013 followed by Japan with 1.6%, and the UK with 1.5%. On the other hand, emerging economies were not growing according to estimates. Accordinr: to the IMF, the emerging markets were expected to grow by 5% in 2013 and about 5.5% in 20146 compared to a growth of 5.3% in 2012 and 6.2% in 2011.62 "The bottom line is that advanced economies are growing more and emerging economics are growing less,,,63 said Pier Carlo Padoan, Chief Economist at the OECD. Some experts even went to the extent of saying that the emerging markets had lost their attractiveness and would no longer make up for any weakness in the developed countries. According to The Economist, "Corporate strategists who assumed that emerging economies were on a straight line of ultra-quick growth will need to revisit their spreadsheets .... ',64

THE ROAD AHEAD

As of mid-2013, Toyota pursued the emerging market strategy with Asia as its 'second mother base'. According to Toyota's Global Vision, the company aimed to implement its TMY Project strategy in the emerging markets by continuing to fortify its core models along with new hybrid models. It would also strengthen its production and supply bases, and enhance its cost competitiveness by 100% localized procurement. 65

However, with the intensifying competition and volatility in emerging markets, analysts felt that Toyota's ambitious target of selling 10 million vehicles in 2013, as well as its long term targets, were at stake. They felt that Toyota might have to take some hard declslons." Analysts also felt that there was a lack of specific strategy at Toyota for the emerging markets. Following the company's unveiling of its Global Vision, Yoshihiro Okumura, of Chibagin Asset Management noted, "Investors are looking for a slightly more specific plan .... With the intense competition in global markets against the likes of Hyundai Motor and Volkswagen it's not clear what Toyota's specific strategy is for staying ahead. ,,67

It looked as lf Yasumori Ihara had a colossal task before him.

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Exhibit I

Toyota's Consolidated Vehicle Production and Sales (2008-2012)

Thousands of Units % Change

For the years 2008 2009 2010 2011 2012 2012 vs.

ended March 2011

Vehicle Production by Region:

Japan 5,160 4,255 3,956 3,721 3,940 +5.9

Oversells 3,387 2,796 2,853 3,448 3,495 +1.4

Total

NOM 1,268 919 1.042 1,338 1,275 -4.7

America

Europe 711 482 433 372 383 +3.0

Asia 961 947 1,021 1,344 1,441 +7.2

Central and 150 151 146 148 152 +2.7

South America

Oceania 149 130 106 113 93 -17.7

Africa 148 167 105 133 151 +13.5

Consolidated 8,547 7,051 6,809 7,169 7,435 +3.7

Total

Vehicle Sales by Region:

Japan 2,188 1,945 2,163 1,913 2,071 +8.3

Overseas 6,725 5,622 5,074 5,395 5,281 -2.1 Total

North 2,958 2,212 2,098 2,031 1,872 -7.8 America

Europe 1,284 1,062 858 796 798 +0.3

Asia 956 905 979 1,255 1,327 +5.7

Central and 320 279 231 281 289 +2.8 South America

Oceania 289 261 251 248 223 -10.1

Africa 314 289 184 209 214 +2.4

Middle East 597 606 466 569 550 -3.3

Other 7 8 7 6 8 +33.3

Consolidated 8,913 7,567 7,237 7,308 7,352 Total

+0.6

Source: Toyom Anmat Reporl2012

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Exhibit II

Toyota's Coosolidated Financial Performance (US GAAP) (2008-2013) (In millions except per share data)

US Yen in Millions Dollars! in

Millions

For the Years Ended 2008 2009 2010 2011 2012 2013 2013 March 31

Net 26,289,240 20,529,570 18.950,973 18,993,688 18,583,653 22,064,192 234,601Revenues

Automotive 24,177,306 18,564,723 17,197,428 17,337,320 16,994,546 20,419,100 217,109

Financial 1,498,354 1,377,548 1,245,407 1,192,205 1,100,324 1,170,670 12,447Services

All Other 1,346,955 1,184,947 947,615 972,252 1,048,915 1,066,461 11,339

lnter- Segment (733,375) (597,648) (439,477) (508,089) (560,132) (592,039) (6,294) Elimination

Operating Income 2,270,375 (461,011) 147,516 468,279 355,627 1,320,888 14,045 (Loss):

Automotive 2,[7[,905 (394,876) (86,370) 85,973 21,683 944,704 10,045

Financial 86,494 (71,947) 246,927 358,280 306,438 3 J 5,820 3,358

Services

All Other 33,080 9,913 (8,860) 35,242 42,062 53,616 570

lnter- Segment (21,104) (4,101) (4,18 I) (11,216) (14,556) 6,748 72 Elimination

Net Income (Loss) 1,717,879 (436,937) 209,456 408,183 283,559 962,163 0,230 attributable to Toyota

ROE 14.5% ·4.0% 2.1% 3.9% 2.7%. - - Per Share Data:

Net Income (Loss)

66,79 130.17 90.21 303,82 3,23attributable to 540.65 (13913) Toyota (Basic)

Annual Cash 140 100 45 50 50 - - Dividends

Toyota's 3,303.49 3,295,08 3,331.51Shareholders' 3,768,97 3,208.41 - -

Equity

lAs on March 31, 2013. USSI'=¥94.01 Adapted From Toyota Annual Report 2012 and Toyota SEC Filings

~----------------------

...._1~4:.;O:.._4-_ International Business S.~tr~at~eg~y _

313-294-1

Exhibit III

Car Production in Emerging and Developed Countries (In Millions)

2002 2012

China 1.10 15.5

South Korea 2.70 4.20

India 0.70 3.30

Brazil 1.50 2.60

Russia 0.98 2.00

Japan 860 8.60

US 5.00 4.10 France 3.30 1.70

UK 1.60 1.50

Spain 2.30 1.50

Canada lAO 1.00

Emerging Countries

Developed Countries

Adapted From Malini Goyal, "Five Reasons Why Allto World Is Shifting to Emerging Markets and What It Means for India," http://ecollomlclimes,lndiatimes.com, May 19, 20/3.

Exhibit IV

Toyota in Emerging Markets

e c:s 'C c • •• Jj e

-e c 'Q. .~ C • 'ii " • :!' •

c Q. .S • .~ '" .S .. c ~ ••• e c • :E • 'C " 'C:e • ~ '" ~ ,;- " e- .. u :e .5 '" " .5

Year Sales 1949 1958 1962 1962 1962 1964 1967 1971 1979 Started

19605 1985

Year Production 1986 1959 1962 1964 1976 1999 1982 1977 2012 2007 1999 Started

First Model Bnndeir produced Oy" ante Stout Hilux Tamaraw Coaster Corolla Kijang Fortuner Camry Quulis L.ocally

Adapledfrom Toyota Annual Report 2012

.._----------------

_--------------------------~EM~E::R:'."GINGMARKETSTRATEGy-O-F_T_O_y_OT_A_-P'~..:.1""4w1'_..oI

313-294-1

Exhibit V

Toyota's Global Vision

F'ruit:Always 8e'tterc.ars Frul't: Enriching lives ot communities Develop vthl<!eswtllch II: xceed customer Contribute tQ communities elJlpectMlons Contribut~ re the future of m!lbll1ty

Su.stainable growth ConsttJnUy dtwe "t1Wl"tJ bette r C(Il'S" "flO

"enrichlnli\:lives of communftit(' by cnl'Urinlisust~n~ltp(ofrt~lIity under

long·rallge persptrtJve

I Trunk: St<'lblebase of business I @otS:TOyotaValue.

-, The To)'od3 Pr~<:epb IT"~~'.Ilrlfn!:prl,,!<:I!)I~~i;lfT~,!.,t~ I Th't' T(l't',)t~ Way I -

Source: Toyota's Annual Report

Exhibit VI

Toyota's Emerging Market Dedicated Models

Models Segment Description Market

Etios HB B Dedicated compact !-IS for Brazil,lndia emerging markets

Enos Sedan B Dedicated compact sedan for Brazil, India emerging markets

Vias B Compact sedan dedicated to Asian Thailand, Indonesia emerging markets

AgyaiAyla A Developed by Daihatsu lndonesia

AvanzalXenia MPV Thailand, Indonesia lMV Series MPV lnnova Thailand, Indonesia, India,

Malaysia

SUV Fortuner Thailand, Indonesia, India, Brazil, Argentina

PU Hilux Thailand, Indonesia, Brazil, Russia, Argentina, Malaysia

Adapted from wwwautomotiva-pdimp- orglwp-content/uploads/20 I3/03/kobayaslu..jillolpdj

.-17 _

142

Exhibit VII

313-294-1

(MY Series Annual Sales Volume (Thousands 0/ Units)

900.,...--------== "".1-------

400

700 .1-------- 600+------ '00+------ 300

200 100 o

2003 200' ",07 2008 ",119 Adapted/rom Toyota Annual Report 2012

Exhibit VIII

IMV Series Vehicle Sales by Region

Ceural &80111h ."lIItfl~ II 111.000)

I~O.

Adapted/rom TOYOfOAnl/uol Report 2012

Exhibit IX

Toyota's Vehicle Sales in Emerging Markets (2000-201 I}

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Global 5,154 5,262 5,519 6,070 6,708 7,268 7,922 8,429 7,996 6,980 7,528 7,097Emerging 960 987 1,142 1,417 1,695 2,027 2,246 2,658 2,849 2,646 3,145 3,193Markets

Composition 18.6 18.8 20.7 23.3 25.3 27.9 28.4 31.5 356 37.9 41.8 45.0RRtio (In %)

(Thol/sands of Units)

Source: Toyota Annual Report 2012

EMERGING MARKET STRATEGY OF TOYOTA 143

313-294-1

End Notes:

"Toyota Seeks Expansion in Cambodia, Emerging Markets," www.thecambodiaherald.com.July2.2013.

Doron Levin, "Inside Toyota's Radical Reorganization," http://features.blogs,fortunecnn.com, March 7, 20 13.

"Emerging Markets: 2015," https:llserver.capgroup.comlinstitutionallemerging- markelslpdffFFT_0611_EM_2015.pdf, June 2011.

Malini Goyal, "Five Reasons Why Auto World Is Shifting to Emerging Markets and What lt Means for India," http://economictimes.indiatimes,com,May 19,2013.

"Aulo Industry Outlook and Review - Feb 20 13," www.zecks.com, February 1[,2013.

Malini Goyal, "Five Reasons Why Auto World Is Shifting to Emerging Markets and What It Means for India," hnp:l/economictimes.indiatimes,com, May 19, 20ll

Henry Fey, "Emerging Markets Buyers Forecast to Drive Car Exports Growth," www.ft.com.Auguet 14,2013.

"Cars Roaring into Emerging Markets," www.marketwatch.com.Aprit 3, 2013.

"The World's Top Auto Markets in 2030: Emerging Markets Transforming the Global Automotive Industry," http://www.skolkovo.ru/publ iclmedialdocumcnts/researchlSIEM S_Monthly _Bri ef nK....20 I0-05_ eng. pdf

"India Automotive Market 2020," http://www.booz.com/medialfile/BoozCo-lndia-Automotive-Market-2020.pdf, 20lL

"The World's Top AUlO Markets in 2030: Emerging Markets Transforming the Global Automotive Industry," hnp:llwww.skolkovo.rulpubl iclmed iaidocuments/research/S IEMS_Monthly_Brie l:inK....20 I0-05_ eng, pdf

Joseph B, White and David Pearson, "Renault, Nissen Boss Remains Upbeat on Emerging Markets," http://india.wsj.com,Septemberll,201l

"Booming Automobile Sector in China," www.pmewswire.com.Septen:ber 11, 2013.

Joseph B. White and David Pearson, "Renault, Nissen Boss Remains Upbeat on Emerging Markets," http://indiawsj,com, September 11,2013.

www.toYOla-global.com/company/history_oCtoyotal75years/te>.1IIeapinK....forward_as_aJlobal_corporationl chapter5/section4/item I.html

Doron Levin, "Inside Toyota's Radical Reorganization," http://features.blogs.fortune.cnn.com, March 7, 2013.

http://pressroom.toyota.comlarti cle_display. cfm?art ide _id=2262

http.z/www.toyota- global. com/company/hi story_oUoyotal7 Syears/dare/autornot ive_busi ness/sales'acti vity/asiali ndex. html

"Update l-Thai Industry Car Sales Seen Down 9.5 pet in 2013 - Toyota," www.rcuters.com. July 17,2013,

"Toyota Eyes Big Growth Ahead in Emerging Markets," www.forbes.corn, April 4, 2013.

"Toyota's New Plant Makes Indonesia Production Hub," www.chinadaily.com.cn. March 18,2013.

"Toyota Will Increase Increase Exports and Localization with Second Indonesian Engine Plant," www.automotivelogisticsmagazine.com. July 31, 2013.

"Toyota Eyes Big Growth Ahead in Emerging Markets," www.forbes.com, April 4, 2013,

"Toyota's New Plant Makes Indonesia Production Hub," www.chinadaily.com.cn. March 18,2013.

"Toyota Eyes Big Growth Ahead in Emerging Markets," www.forbes.ccm, April 4, 20ll

"Toyota Seeks Growth in Emerging Markets," www.dw.de, May 25, 2012.

"Toyota Eyes 50% Of Global Sales from Emerging Markets," www.indianexpress.com. March 9, 2011.

"Toyota Kirloskar Auto Parts Formally Announces the Inauguration of its Gasoline Engine & Transmission Plant," www.royotabharat.com, February 22, 2013. Kobayashi Hideo, "Toyota's Strategy towards the Brazilian Market," http://www.automotiva-poliusp.orglwp- contentluploads/20 !3/03/kobayashi-final.pdf "Toyota Eyes Big Growth Ahead in Emerging Markets," www.forbes.corn, April 4, 2013.

Ma Jie, "For Toyota Dealer in China, Lost Year Underscores Japan Challenge," www.autonews.com, September 15,2013. Masatsugu Hone, "Toyota Supplier Considers China Capacity Boost on VW. OM Orders," www.bloomberg.corn, January 16,2013. "Toyota to Put Off China Plant Amid Isles Row, May Delay Another," http://ajw,asahi,com, December 09, 2012.

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