The announcement of Tesco subsuming its China business into a 20per cent stake in a joint venture with China Resources is, perhaps, a major piece of news, and, perhaps, the first part of a two-part step, which would herald a major icebreaking move by China and the UK.
The news, which looks bleak, might actually be the way they should have gone at the outset, instead of thinking they had global capability. It may be that this swap of equity for assets is the right formula, and may actually lead to a much bigger realisation of value for Tesco and its shareholders. And it might signal more about the future than anyone involved had contemplated, except, of course, for the far sighted Chinese who may well have planned this some time back.
Tesco’s China supermarket venture suffered from over-exposure to a challenged major retail giant, who had taken retailing to China, in the mistaken belief that they could bring home a major new profit stream by developing large-scale retailing in the new, opening China consumer market. Instead they found that they were over-stretched in many directions with falling profits, and that China, far from being a source of great new profits, was, in fact, a great and diversionary drain on corporate resources.
Not the first to find that China is unique and far from being an easy market, they were unable to find a comprehensible market where they could build a supermarket chain.
The story starts 20 or so years ago, when Tesco were given the green light to buy many goods from China directly and with ease and at low prices. Tesco brought their huge buying into China, just as Walmart did, and enabled China to meet the British market with big volumes at low prices. The story is repeated all over the West as China began to be the global supplier of low cost goods to retailers.
Tesco were very successful at finding the right goods to have made by keen and eager exporters and get those goods to market efficiently.
From that they then developed the idea of going into retailing in China with the thought of having a chain of stores in China, as China moved into the world of the middle classes. Tesco were looking at an apparently virgin market dominated by small retailers and felt that they could use their Western skills to get into the Chinese market and build a great new business.
Instead they found a very complex market with complicated planning laws, and a retail public who were not attuned to the Western way of buying their produce.
As corporately the draining was having an effect, Tesco had to accept that they were primarily a British retailer and international development might be a step too far – a lesson many retailers have learnt around the world. It is not easy to take a nationally competent management team with excellent local knowledge and logistics and use that to build in new countries and markets.
But the outcome, which is more detailed below, might have a nugget within it. Tesco’s 20per cent subsuming into a large joint venture with the historically important Chinese company – China Resources might lead to a stake in Tesco being taken by China.
This is one of several logical ways for multi nationals of the West and China to develop their business models, and enable China to express its adding value to exports to its logical conclusion – buying into Western retail.
Could Tesco become the first major Western retailer to have a significant Chinese shareholder? If so what percentage initially and leading to?
China Resources and Tesco are both well known to me as our companies did business with both for many years. My first full-time job was opening the Tesco account in 1968 selling them cups and saucers from China. We grew the business over the years, until China and Tesco decided to transform the scale by a hundred times or more.
China Resources was the Hong Kong outpost for China’s Foreign Trade corporations and built a huge presence in Hong Kong over the decades. We had a highly successful business with them for many years and they were always very capable and worldly. Today it is a global giant but its core is deeply ingrained in trading and retailing. It is one of the more advanced retailers of China, having developed a successful business in the demanding Hong Kong market for many decades.
Lord Mandelson has said that Europe must stay at the top of the value chain. He is right, but they might have to get used to sharing that with Chinese companies, but they should use such concessions to gain greater access to the China market as Tesco might have done, or is this a slow exit for Tesco – I hope they turn a difficult period into a real partnership opportunity.
Unwittingly, Tesco might be the icebreakers of retailing integration between the UK and China.