Hutchison Whampoa Ltd NOTE: the currency referred to in this case is Hong Kong dollars. The Hong Kong dollar is tied to the US dollar. At the time of writing the US dollar was worth HK.76 and the Australian dollar was worth HK.95. Company profile Hutchison Whampoa is a Hong Kong based multinational conglomerate with business interests that range from property development to mobile phones, and stretch from Asia through Europe to North America. At its core is a property developer that made a fortune from building commercial and residential property in Hong Kong. The company name comes from a business established in 1863 to acquire docks and ship repair yards at Whampoa, on the Pearl River in China and at Aberdeen in Hong Kong. It prospered and survived war and revolution, but remained essentially a ship repair business until the mid to late 1960s when its growth into a diversified multinational really started. The catalyst for change was the redevelopment of its Hong Kong docks into residential estates like Whampoa Gardens. Success in property development fuelled an ambitious and rapid expansion over the last quarter of the twentieth century. Hutchison Whampoa has diversified into retailing (supermarkets, electronics and personal care), hotels, ports and port services, manufacturing, media, energy (mainly electricity and oil) and telecommunications. It is a hard company to describe because it is constantly growing and changing. In 2005, acquisitions resulted in the number of countries Hutchison Whampoa operates in rising from around 40 to over 50, and the total number of employees rising from around 170 000 to over 200 000. The company is split into five divisions. • Property and hotels • Ports and related services • Retail • Energy, infrastructure, investments and others • Telecommunications With deals being done and businesses being bought and sold continuously it is necessary, when describing the structure of the group, to add the disclaimer that this was the state of affairs at a particular point in time. The diversity and number of activities can be seen from the following snapshot (table 1). Table 1 A S Watson Retail, manufacture and distribution of water and other beverages Hong Kong, mainland China, Europe Harbour Plaza Hotels and Resorts Hotel management Hong Kong, mainland China Cheung Kong Infrastructure Power generation and distribution, road building, toll roads, water and gas distribution UK, mainland China, Australia Hutchison Harbour Ring Electronics and toy manufacturing Hong Kong, mainland China Hong Kong Electric Holdings Power generation and distribution Hong Kong TOM Group Wireless internet, outdoor media, publishing, satellite TV, film and TV production Mainland China 3 Group 3G mobile phone network Hong Kong, Australia, UK Hutchison Port Holdings Container terminal operations Hong Kong, mainland China, UK Hutchison Whampoa (China) Healthcare products, traditional Chinese medicine, aircraft maintenance, rice farming and trading, distribution and logistics Several of Hutchison Whampoa’s businesses are publicly listed companies. Mostly Hutchison Whampoa has a controlling interest, but not in the case of one of the jewels in the group, the Canadian oil and gas company, Husky Energy. Hutchison Whampoa owns just over a third of Husky’s shares. The A S Watson Group, as the retail division is called, is the largest division in terms of turnover and employees. This is hardly surprising given that it includes a supermarket (Park ’n Shop) as well as an electronics retailer (Fortress) and a personal care retailer (Watsons Your Personal Store). It boasts over 7000 retail outlets, with a substantial network in Europe (using several names such as Kruidvat, Superdrug, Rossman and Spektr). The retail division also includes the manufacture and distribution of water and other beverages under the brand names Watson Water, Mr Juicy and Sunkist. The ports and related services division grew out of the original ship repair business. When the company closed its yards in Hong Kong and started down the path of property development, it also built a new container terminal at Tsing Yi (in Hong Kong) and diversified into cargo handling. In 1991, it bought the UK’s busiest container port at Felixstowe. Subsequently, it expanded globally. The division has a big presence in China with major operations in Shenzhen, Shanghai, Ningbo and Zhuhai, among others. The telecommunications division includes the business that Hutchison Whampoa is best known for in the West: the 3 Group. The 3 Group derives it name from the product, 3G (third generation) mobile phones. The 3 Group has built and operates these fast digital telephony networks in several countries throughout Europe and in Australia. The energy, infrastructure, investments and others division includes a diverse collection of activities including electronics and toys manufacturing, a Chinese language media group, business-to-business and business-toconsumer ecommerce operations, and the construction and maintenance of roads. Apart from residential and commercial property development in Hong Kong and China, the property and hotels division also manages several large hotels in Hong Kong including Harbour Plaza Resort City (1102 rooms), Harbour Plaza Metropolis (820 rooms) and the new Rambler Garden Hotel (800 rooms). The group also has major interests in hotels in Beijing, Chongging and Kunming in China, and others in the Bahamas. The Hutchison Whampoa portfolio is so diverse that there are no obvious company-wide synergies. Some divisions have inter-linkages though. For example, retailing and hotel management both need premises that can be provided by the property arm. These premises can also host the communications towers used by the 3 business. But some of the businesses that Hutchison Whampoa has invested in seem to be part of the company simply because it seemed like a good idea at the time. Recent corporate performance In its accounts Hutchison Whampoa divides its businesses into two broad categories: established businesses and the 3 Group. The importance of this distinction becomes evident from just a cursory look at the corporate accounts. The established businesses are all profitable, but the 3 Group has lost billions of dollars. Overall revenue has grown from .6 billion 10 years ago to 2.6 billion in 2005. Group profits have fluctuated — dipping during the Asian economic crisis of 1997/98 before rebounding strongly and then plunging again in the early 2000s. The standout year was 1999 when the sale of its Orange mobile phone business gave a huge fillip to the bottom line (a profit attributable to shareholders of 7.8 billion). Since that spectacular success, the overall performance has been far from stellar (with profit varying between .5 billion and .3 billion over the last five years). The retail division is consistently profitable, but operates in a highly competitive market and so does not boast a high margin. Despite fierce competition, revenue in the retail division has shown strong growth over the last three years but profits have remained flat. In contrast, the ports and related services division has roughly one third of the turnover of the retail division but contributes more than three times as much to the bottom line. In 2005, the ports and related services division earned a profit attributable to shareholders of .2 billion on a turnover of .9 billion. The telecommunications division has enjoyed rapid turnover growth, jumping from .7 billion in 2004 to .5 billion in 2005 but it continues to suffer massive losses, which rose from .2 billion in 2004 to .5 billion in 2005. In recent years, apart from profit on the disposal of investments, the ports and related services division has consistently been the biggest earner. At the other end of the scale, the 3 business has lost so much money that it exceeded the profits from all the other division put together. If it were not for the money being made from the disposal of investments, Hutchison Whampoa would be losing money. In 2005, the profit from the disposal of investments exceeded the overall bottom line. This has not been lost on the investment community and Hutchison Whampoa’s share price has underperformed the market for several years, prompting the Far East Economic Review to call the company a value destroyer. As the losses increased, so did borrowing. Hutchison Whampoa has long kept substantial funds in liquid form, and that remained true even as 3 drained away its reserves, but the rise in debt has resulted in a squeeze that has started to limit Hutchison Whampoa’s investment options. There is a stark contrast between the generally rosy picture painted in the company accounts and the view of the stock market and business commentators. Hutchison Whampoa has had many critics since the 3 business started to drag down its profits, and the share price has suffered, but the annual report shows steadily increasing net assets, consistent payment of dividends and, in the last three years, an upward trend in profit attributed to shareholders. Only time will tell whether the company’s optimism is justified or whether the market pessimism is well founded. The corporate leadership at Hutchison Whampoa Before explaining the company strategy, it is necessary to know something about the people who make the key strategic decisions. The man behind this empire is Li Ka Shing, known in his native Hong Kong as ‘superman’ for his success in making deals. He is widely regarded as one of Asia’s richest business people. He built up a reputation for a golden touch after a string of successes. Li Ka Shing’s success in deal making is underpinned by his political connections. He prospered under the British, but extended his networks into China before the handover of Hong Kong to China in 1997, so he was well placed to ride the rapid growth of the reformed Chinese economy. Li Ka Shing was born in 1928 and has seen tough times. As a teenager he witnessed the horrors of World War II and the Japanese war on China. He is, in many ways, quite frugal in his personal habits and despite his wealth has not succumbed to the temptation to build a ‘look at me’ edifice headquarters. Indeed, the Hutchison Whampoa building in Hong Kong is a modest affair, easily overlooked as it is surrounded by some striking architecture that clearly intends to make a statement, like the Bank of China building. Li is undoubtedly a canny investor; like several other Hong Kong tycoons his wealth comes from property development in Hong Kong. A decision by the British authorities early in the life of the Hong Kong colony to set aside a very large proportion of the land for parks left the growing population jammed into a tight space. Land was therefore very valuable and getting access to build on it was a ticket to prosperity. Li built up connections with the authorities and bankers and so was very well placed to bid for land that the government sold. This insider status was a key factor in his success. But therein lies a potential weakness for Hutchison Whampoa. A core competence of the company may well be Li’s connections. Can they be passed onto the next generation or to outsiders recruited by the company? Li has for some time recognised the need to modernise his management thinking and has recruited people for their professional competence. The board of Hutchison Whampoa includes Westerners like Holger Kluge (a Canadian banker) and Simon Murray (a private equity fund manager). But the key manager in the company is Group Managing Director, Canning Fok. He is widely seen as Li’s right-hand man. He is paid handsomely for his loyalty and his ‘enormous’ salary is widely discussed in the Hong Kong press. The fact that he supposedly earns more per hour than most Hong Kong people do in a year is all the more remarkable given that Li Ka Shing’s eldest son Victor is deputy chairman. Canning Fok is not the only nonfamily member in top management to be paid handsomely, the list also includes the Group Finance Director, Frank Sixt (a Canadian) who is paid in the millions. In contrast, Li Ka Shing only gets director’s fees. The power of Li Ka Shing’s reputation can be seen in the willingness of investors to buy into his businesses such as the TOM Group which was massively oversubscribed when it was listed on the stock market. However, the last few years have seen the shine on his reputation dulled with the spectacular losses in the 3 business. His stubbornness to keep going in the face of mounting losses showed another side to his management style. To pull the plug on the 3 business would result in a substantial loss of face. As Li Ka Shing gets older it appears his thoughts are turning to the legacy he will leave, and being associated with a failure does not feature in his plans. While Hong Kong features prominently in his legacy, his largesse can be seen in other places as well. For example, Li has donated HK million through the Li Ka Shing Foundation to fund clinical studies and health sciences research at the Faculty of Medicine at the Chinese University of Hong Kong, and he has also funded the university library at the new Singapore Management University. enjoys good health, Li is approaching 80 years old and he bestrides an ever more complex empire. Despite a high degree of centralisation in the strategic decision making, Li has been forced to let go of daily oversight of the vast array of businesses. Rivalry between Li’s sons about the eventual succession was solved by Richard Li, the younger son, who left to build his own empire at Pacific Century Cyberworks (PCCW), which he used to take over the former Cable and Wireless Ltd owned fixed line telephone monopoly, Hong Kong Telecom. This avoids the potential for a bitter dispute over the inheritance that has plagued other family empires like the Reliance Group in India. Asian management style In such a diverse and changing collection of businesses it is difficult to create and maintain a unique corporate culture. There is no ‘HW way’. But in many ways, despite modernisation, it remains largely a paternalistic, Chinese family business. Li Ka Shing prides himself on his common touch, as evidenced by his participation in Hutchison Whampoa events like its family picnics. He likes to show visitors that he wears a ‘normal’ watch (not an expensive bejewelled one) that is set eight minutes fast. While the company operates in more than 50 countries, the majority of Hutchison Whampoa’s employees are still based in Hong Kong. The paternalistic style of the company can be seen it its universal medical, life and disability insurance. Like many multinational companies it says that its employees are fundamental to its success, but the commitment to universal insurance shows that this is more than just words. In several of the countries that it operates insurance is the exception, not the rule. In places like China and Hong Kong this makes Hutchison Whampoa businesses more expensive to operate than its competitors. The company also offers its employees the chance to buy from its shops at discounted rates, further adding to its cost structure. The benefit is employee loyalty and higher productivity. Hutchison Whampoa demonstrates its attitude to its employees in other ways as well. It invests in education and training with an e-learning centre. It also offers training that leads to the award of formal educational qualifications. However, Hutchison Whampoa is changing. The move into Western markets through the investment in businesses like Husky Energy has required Hutchison Whampoa to adopt a more transparent management style and be more open about corporate strategy. Its managers often talk to the media about the company and its problems. The accounts, warts and all, are presented in a manner easily understood by the investment community and are easily accessible through the corporate website. Company strategy Despite recent changes towards a more Western style of management, Hutchison Whampoa is still very much an Asian company. It has grown through acquisitions, joint ventures and strategic partnerships. It is a truly diversified conglomerate. A very sizeable chunk of the company’s profits has always come from buying and selling assets. Its corporate strategy is the embodiment of the business philosophy of the people who run it. Li Ka Shing has a good eye for a deal. He is not averse to selling even ‘core assets’ if the price is right. The company management are opportunists and will buy anything that they think will make money. Hutchison Whampoa has never been afraid of working with others to achieve its goals. It has dozens of partners including several actual or potential competitors. For example, Telstra in Australia where the 3 business provides the means for Telstra to enter the 3G business at lower cost and risk, Skype (the internet phone company) and Singapore Press Holdings (which is a competitor for the TOM Group). One attribute shared by most of Hutchison Whampoa’s long-term investments is that they have some degree of monopoly power. Several of Hutchison Whampoa’s businesses in Hong Kong have benefited from regulatory protection from competition. For example, until recently 3 had the only licence to operate a 3G phone network in Hong Kong. Electricity generation has also effectively been a monopoly. Other parts of the Hutchison Whampoa empire have enjoyed some insulation from competition due to location advantages or high barriers to entry (or both in the case of several of its port operations). A noticeable absence from its portfolio though is a bank. Hutchison Whampoa is not simply a buyer and seller of businesses. The company has shown the ability to build businesses. The profitability of the ports business is remarkable, especially considering the nature of business and competition in China, where in industry after industry (such as electronics, steel and car manufacturing) profits have attracted new entrants and cutthroat competition has driven down margins brutally. The ability to innovate is also clearly in evidence at the business level. For example, in the Hong Kong supermarket business outlets are traditionally small and numerous, focusing on being close to the customer, but Park ’n Shop broke with that in recognition that small size limits the product range. Hong Kong supermarkets are already cluttered, cramming as much as possible into the precious space (largely due to the high cost of property) but in recent years convenience has been slowly redefined from closeness to the customer’s home (which is important in Hong Kong given its high-rise and crowded lifestyle) to one-stop shopping, requiring a broader range of goods. Park ’n Shop moved ahead of rivals like Wellcome by building ‘superstores’ with far larger floor space than a traditional Hong Kong supermarket. The 3G mobile phone business has also tried to innovate by turning phones into multi-use devices (with mobile TV and internet). The problem with innovation is offering something that the customer actually values. In the supermarket business the understanding of the customer is evident, but in the 3G phone business the company seems to have misjudged the consumer. Perhaps this is because it has only been recently that closeness to the consumer has become important to the company and it has a shortage of people with a consumer marketing background. After all, a company like Hutchison Whampoa can get its property strategy wrong but still sell its flats (if not for the price it hopes for), but if a product like a phone does not suit the customer it will sit on the shelf until obsolete and scrapped. The 3 Group The story of the company in recent years has been the failure of the 3 phone business to fulfil the promise touted when Hutchison Whampoa committed itself to this path. So why has the 3 business been so big a problem for so long, and why has Hutchison Whampoa persevered in the face of mounting criticism of its strategy? It is easy enough to see where the money went. It is very expensive to build a mobile phone network. It has also been expensive recruiting subscribers. The handsets had to be heavily subsidised and large sums had to be spent on advertising and brand building. The problem was that this did not result in enough revenue. Revenues have grown very fast but from a small base. The original handsets suffered from short battery life due to the large screens and fast processors. They were also bulky. Progress has been made on both fronts, but there is still a public perception that 3G phones are bricks that need constant recharging. The key advantage of the 3G phones is faster data transmission meaning that mobile internet and TV are possible. The problem 3 had was getting subscribers to pay extra for it. In the early days the company also had to overcome public perceptions that the network coverage was inadequate. The 3 business suffers from the problem facing many pioneers in high technology hardware industries: heavy upfront costs. Ultimately the network effects if the technology becomes a standard can generate massive profitability, but it is a fast moving industry and a darling today, like Vodafone or Dell, can become a dud tomorrow as technological advances and changing consumer behaviour alter the rules of the game. 3 had a window of opportunity to establish itself before better technology and new competitors came along, but it misread the market. With hindsight it is now clear that the 3G phones should not have been positioned in the market as phones (and so compete against the GSM phones with their greater convenience) but as a new product (say mobile computing). 3G phones appeal to gadget lovers but most customers still use phones for voice and text. Mobile television or internet has not been attractive unless effectively free. This is largely due to the limits of the handsets, especially the small screens. The rapid growth of voice over internet protocol (VOIP) and internet phone companies like Skype is both a threat and opportunity. 3G phones offer fast mobile internet but VOIP is so competitive that margins are razor thin. 4G is a bigger threat with the potential for GSM network operators to leapfrog 3G. So it is easy to see where the company went wrong, but why did they persevere? In part this is due to the personalities involved, but Li can also boast a triumph in the telecommunications industry. Hutchison Whampoa sold the Orange mobile phone company for a massive profit at the height of the telecommunications bubble in the late 1990s. This success may explain much of the optimism surrounding the 3 venture. It is not the first time Hutchison Whampoa has tried to repeat past successes. Strategy of conglomerate diversification Li Ka Shing’s approach to building his business has both its fans and detractors. The key advantage of diversifying into unrelated businesses is risk pooling. If one business in the portfolio is losing money, say 3G phones, then other more successful businesses, like the ports and related services division, can keep it afloat while the problems are sorted out. The result should be greater stability. The company management does not have to ‘let employees go’ and this saves face. In extreme cases employees can be redeployed to other parts of the company. Unrelated diversification is also a way of growing quickly. With increased size comes status, prestige and power that, in Asia, can further fuel growth by making it easier to raise capital and do deals. The trick is to manage the company’s cash flow and Hutchison Whampoa appears to be good at that. However, as they grow, conglomerates get more complicated to manage. Complexity typically results in poor decision making (largely because growing complexity results in decisions being increasingly based on superficial analysis) and increased coordination costs (such as the necessity to have more meetings). The management at Hutchison Whampoa have certainly faced increasing complexity and higher coordination costs. The company’s capital has had to be managed carefully to prevent the 3 ‘black hole’ starving other businesses within the group of the capital they need to prosper. The cross-subsidy from the established businesses has taken some of the fiscal discipline out of the strategic decision making in the telecommunications division and allowed its managers to put off hard decisions. In America there are corporate raiders that hunt down diversified conglomerates to profit from breaking them up, but in Asia (and often in Europe) priorities are different. Shareholders and shareholder value are not as important. However, Hutchison Whampoa Ltd would still be vulnerable to attack by vulture capitalists if it were not for the dominance of Li family interests in its ownership structure. The future The future for Hutchison Whampoa is highly uncertain. It depends to a large extent on the health of the mainland Chinese economy. A slowdown in Chinese trade could hit the ports business directly. Hong Kong’s increasing economic and political dependence on the mainland means a slowdown on the mainland could flow through to affect the domestic economy, cutting into the turnover and margins of Hutchison Whampoa’s Hong Kong retail business. This could quickly flow on further to drag down revenues in its property and telecommunications divisions. Even Husky Energy could be hit as Chinese demand is a key factor in the high price of energy. Through his connections with high-placed officials in the Chinese government, Li is well placed to get early warning of any slowdown or change of economic strategy. Li Ka Shing is well aware that the Chinese are already investing heavily in a new coastal economic development zone near Tianjin and Beijing to spread the benefits of trade-derived growth beyond the magnets of the Pearl River delta (Hong Kong and Shenzhen) and Shanghai. While this will not happen overnight, it represents a challenge for Hutchison Whampoa’s ports business in particular. Turnover in the retail division, hotel occupancy and even electricity sales are sensitive to the number of visitors to Hong Kong. To a large extent mainland tourists have filled the increasing gap left in visitor arrivals as others find Hong Kong less attractive. But mainland tourists are already starting to venture further afield. The opening of Disneyland in Hong Kong has boosted arrivals, but chronic air pollution is undermining the tourism industry in the longer term. Further uncertainty flows from the political changes occurring in mainland politics and the Hong Kong Special Administrative Region (SAR) government. The attractiveness of using Hong Kong as a base for operations in China is being eroded as parts of the mainland catch up. This is not necessarily a bad thing for Hutchison Whampoa as it becomes more involved in mainland business, but prosperity in Hong Kong is the bedrock upon which Hutchison Whampoa is built. Outside Hong Kong, a range of political, economic, social and technological trends in Hutchison Whampoa’s main markets could have a major impact and add to the air of uncertainty surrounding the company. A high proportion of its businesses are either directly or indirectly affected by the value of the American dollar. The chronic US trade deficit could precipitate a substantial decline in the value of the greenback, reducing China and Asia’s competitiveness and hence trade volumes. Technological change also looms as an important imponderable. It has the greatest immediate impact on the 3 Group but it could affect other parts of the empire, such as Hutchison Whampoa’s media interests, manufacturing and even retail (with ecommerce in its infancy in Hong Kong). Hutchison Whampoa’s diversified portfolio of businesses could turn out to be an effective hedge against hard times in Asia, but the question remains whether the shareholders would be better off if the company was broken up. Discussion questions 1. Hutchison Whampoa is a leading example of a widespread phenomenon in Asia — the diversified conglomerate. Why are diversified conglomerates popular in Asia? 2. If Hutchison Whampoa were a US listed company it would be a highly likely target for a corporate raider to buy, break up and sell off. If it were broken up and reorganised what would be the best structure to improve shareholder value? 3. While the 3 business has been a major drag on Hutchison Whampoa’s recent financial performance, many of its other businesses have been successful. So what are Hutchison Whampoa’s core competencies or strengths? Conversely, what are its weaknesses? 4. From a strategic management point of view, what are the pros and cons of having a strong and charismatic leader like Li Ka Shing in a company the size of Hutchison Whampoa? 5. From a strategic management point of view, what are the pros and cons of having a family-like corporate culture in a company the size of Hutchison Whampoa? 6. Many Asian diversified conglomerates have banking or financial firms in their portfolios but Hutchison Whampoa does not. What could be the pros and cons, and strategic implications of adding a bank to the group?
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