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September, 2002:

Hong Kong Tobacco Co

SEPTEMBER 13, 2002 – CHINA JOURNAL – By Mark Clifford – Businessweek

China’s Experiment: Read All About It!

A joint venture distributing books, newspapers, and magazines may seem insignificant, but it could be huge as a catalyst for reform

China’s Communists have obsessed over tight control of the media since the party’s rise to power. Indeed, it’s telling that China’s far-reaching concessions to enter the World Trade Organization included no relaxation of the state’s ownership of newspapers, magazines, and other forms of mass media — and only the most grudging nod to privatizing such seemingly noncontroversial businesses as bookstores.

The reason is pretty clear: Authoritarian governments fear that even the slightest crack in the ideological façade will unleash a torrent of dissent. Yet that hasn’t stopped a handful of feisty newspapers and magazines sprouting in Guangzhou and Beijing. Book publishers in China increasingly are pushing the bounds of party control. Independent filmmakers have started to appear — though they often find it easier to produce movies than screen them.

And on Sept. 8 in Beijing, a little-noticed but potentially important $30 million joint venture was launched between the formidable People’s Daily and Hong Kong’s Global China Technology Group. The joint outfit, Greater China Media Services, won unprecedented nationwide retail and distribution rights for any newspaper, magazine, or book published in China. (In a separate venture, Global China Technology Group is also angling for the rights to distribute publications printed outside of China.)

OTHER CHOICES. Why is this development worth watching? It’s the first crack in the monopoly powers long enjoyed by China’s post office and its Xinhua News Agency. Until now, newspaper and magazine publishers had two choices: Use the postal service or do their own distribution. Similarly, book publishers could use Xinhua or peddle their own wares. But if, for example, People’s Daily set up a distribution network for its newspapers, it couldn’t handle anything produced by another publisher. Now, other choices will be available.

Beijing is walking a tightrope. In media, as with other sectors before it, the government is hoping to control the pace at which markets open. It seeks the efficiencies that a more competitive, market-oriented economy can bring. But it also wants control and stability.

Yet, progovernment as the players behind Global China Technology Group are, I’ll bet that competitive forces will inexorably lead to a freewheeling media scene. After all, in other areas — whether it’s selling televisions or books — China’s domestic market has proven to be brutally competitive. Sure, periodic crackdowns will still happen. But as far as media competition goes, one plus one is going to equal a lot more than two.

BEYOND IMAGINATION. Again and again, small, controlled experiments have unleashed a torrent of change. That’s how China’s farmers went from being Maoist drones on the commune to market-driven peasants squeezing vastly higher yields out of their own plots.

The stock market presents a more recent example. What started as a limited experiment to provide funding for corporate restructuring, and to do so without changing the system, has developed far beyond what reformers would have imagined. It also has forced policymakers to take account of investors’ reactions in ways that would have been unimaginable even a decade ago. Unlike Japan and South Korea, where domestic cartels kept prices high and choices limited, China is big, sprawling, and filled with demanding businesspeople and consumers hungry for goods and services.

At the very least, the end of the distribution monopolies also is likely to mean lower prices. The China State Post Bureau’s postal monopoly translated into $654 million in revenues from newspaper and periodical distribution last year — a healthy 12% increase on the $585 million figure it recorded in 2000. (To put that in perspective: Total postal revenues in 2001 were $5.7 billion, so newspaper and magazine distribution totaled about 11% of postal revenues.)

DIPLOMATIC TYCOON. Xinhua’s monopoly over book distribution gives it a chokehold on the market, which is worth an estimated $10 billion — in terms of total revenues to publishers, retailers, and distributors — according to Global China chairman Charles Ho.

It’s little surprise that the Chinese chose someone like Ho to head a pioneering venture in such a sensitive area. The 52-year-old chain smoker comes from a wealthy Shanghai family that fled to Hong Kong after the Communist revolution in China. But he’s a Middle Kingdom player nonetheless.

The family fortune comes from the tobacco business, where Ho controls the privately held Hong Kong Tobacco Co. He’s one of a small circle of influential Hong Kong businessmen who are proudly capitalist but delighted to do business with Beijing. He may be a newcomer to the politically sensitive media business, but he’s shaping up as a savvy outsider.

PAPER DEBTS. Ho got into the media business only in the late 1990s, when he took over the venerable Sing Tao publishing empire. Sing Tao was launched back in 1938 by Aw Boon Haw, the founder of the Tiger Balm ointment empire. His daughter, Sally Aw, lacked her father’s business acumen and borrowed heavily from Ho’s family.

When she couldn’t repay the debt, Ho moved in to dislodge her grip on Sing Tao. Through a series of complex transactions, which saw investment bank Lazard Freres buy and manage the paper for a period, Ho’s company ended up with full control in 2000.

Sing Tao is arguably the most international Chinese newspaper, running editions in London, New York, San Francisco, Los Angeles, Toronto, Vancouver, and Sydney as well as in Hong Kong. It also publishes The Standard, an English-language daily in Hong Kong that runs a distant second to the South China Morning Post.

OFF LIMITS TO OTHERS. Sing Tao is building up a stable of lifestyle and PC magazines in Hong Kong. And it has a slew of small mainland ventures, ranging from a broadband network in Shandong province with about 30,000 subscribers to an information service undertaken with the government-run Xinhua News Agency. Yes, it’s part of the same group that distributes books and will be competing against corporate cousin Greater China Media Services.

It’s not clear how this is all going to gel as a business. But what’s interesting is that the Chinese are giving Ho access to some ventures that are off limits to most other foreigners.

Although Ho portrays his entry into the media business almost as an accident, he makes it clear that he wants to use the Sing Tao network to build a global empire of Chinese-language publications. And, if the time is right, he clearly would be interested in mainland media properties. Media Services will have about 10,000 people working for it by the yearend 2003. And it won’t just be distributing newspapers and books. It’ll set up a chain of retail stores selling everything from candy to cigarettes, as well as books and magazines.

TRUSTWORTHY. Ho has spent much of the past decade cultivating contacts in Beijing. His family has donated heavily to various charitable causes on the mainland. He’s a former member of the Chinese People’s Political Consultative Conference, a prestigious but largely ceremonial body that the Communist Party uses to rope in businessmen and other nonparty members that it deems useful. Ho also is on the board of directors at China National Aviation and China Petroleum & Chemical (Sinopec), each a heavyweight mainland companies listed on the Hong Kong stock exchange.

It’s clear from the license he received that the Chinese feel Ho is a man they can trust. Indeed, he seems likely to go out of his way to avoid offending China. Last year, Sing Tao’s New York edition ran an advertisement placed by the Falun Gong spiritual movement. Beijing calls the group an “evil cult” and has tried to stamp it out with arrests, torture, and jailings. Ho apologized to Chinese officials and says none of his newspapers will run any more of the group’s ads.

CEO Wong Wai Ming says the paper doesn’t take political advertising of any sort and that it will try to reflect middle-class concerns. In other words, it isn’t going to adopt a more confrontational stance toward the government on political issues.

MURDOCH’S KOWTOW. Sing Tao happily will criticize the government on issues like a recent fiasco regarding regulation of penny stocks. But it’s unlikely to urge greater tolerance for the Falun Gong or a faster move toward democracy. Indeed, C.Y. Leung, the head of the nonelected Executive Council (sort of a kitchen Cabinet for Chief Executive Tung Chee-hwa), sits on the Global China board.

Ho, in short isn’t likely to make the sort of mistake that Rupert Murdoch did in 1993, when he pronounced satellite TV an “unambiguous threat to totalitarian regimes everywhere.” That was shortly after Murdoch’s News Corp. bought Hong Kong-based satellite broadcaster StarTV. The Australian mogul has spent much of the past decade kowtowing to the Chinese and trying to get back in their good graces.

Short of revolution, China’s media isn’t going to change with a big bang. For as long as possible, the relative handful of bureaucrats who run the country’s propaganda efforts are going to keep the opening as controlled as possible.

THE MARKET’S MIND. “Friends of China” like Ho will be welcome, however cautiously. (Indeed, the day after Ho inked his venture, fellow Hong Kong tycoon Li Ka-shing’s announced an agreement in principle with a mainland publisher for an advertising and distribution venture, though it’s smaller and at a more preliminary stage.) Those deemed enemies — such as Jimmy Lai, publisher of the rival Apple Daily — are barred from selling their newspapers or basing reporters in China, and that’s not likely to change.

I could be wrong. China may be able to keep the lid on the media business longer than I imagine. But even though Ho and his lieutenants have no interest in reforming the system, the market has a mind of its own, propelling change in unexpected directions. Ho’s thousands of employees will have a business to run, and it’s one that will make them less susceptible to government diktats.

If a lesson can be drawn from the 23 years since China’s reforms began, it’s that closing the door on experimental openings of the sort that Global China aims to exploit is impossible. Beijing’s leaders know this all too well and are terrified of where it will lead. But they also know that, once the door has been opened, there’s no turning back.

Developmental Research for New Australian Health Warnings on Tobacco Products Stage 1

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