Li Ka-Shing: Oh, the shark bites/With his teeth, dear…
The Hong Kong tycoon Li Ka-shing looks great gracing the cover of Forbes in its Asia’s richest people editions, especially when juxtaposed against his silver-mirrored skyscraper, the Centre, one of Hong Kong’s architectural landmarks. His flagship companies Hutchison Whampoa and Cheung Kong are big, top-tier and world famous, owned by investors around the globe.
Less well-known is that the Hutch empire is also one of the cheapest outfits you’d ever want to do business with – but the secret is becoming increasingly less “best kept”. Consider the flurry of bad news that hit the group in the course of just one week last month:
• Customers of the conglomerate’s dominant Hong Kong grocery chain, Park’N Shop, buy what they think is codfish – and spend the night on the loo. It turns out to be indigestible “oil fish” that was inadvertently “mislabeled.”.
• Top Cheung Kong executive Justin Chiu, the company’s key liaison with the international investor jet-set, is in the news after he sold a flat in Yuen Long which he said was more than 2,000 square feet – but turned out to be more like 900 square feet. The enraged buyer shreds the man’s integrity in TV and Chinese press interviews.
• The week’s crowning glory came when buyers of a luxury villa in Beijing, “the Greenwich,” revolted over shoddy quality. They paid top dollar for a brand name piece of luxury: and got slanting walls, tinsel-cheap fixtures, and air conditioning systems so defective you could put them on high gear and still probably run “hot Yoga” courses on the premises.
All this negative publicity is hardly a coincidence. Hutch and CK are notorious for using the power of their name to shake down both customers and suppliers.
They pay, for instance, some of the smallest fees in the banking industry. Hutch is an active trading house – it is always spinning off parts of the group into separate units that can be repackaged and sold as a new company on either local or overseas stock markets. Yet Hutch often expects mid-tier local brokerages involved in such offerings to do the business without a fee – just to have the honor of being associated with the great name.
Even the biggest banks in the world bow to the company’s parsimonious demands. Goldman Sachs typically takes 2.5 percent fees when it brings a company public in Asia, which is the standard price. But when dealing with Hutch it gets less than half that. Take the listing of Hutchison Telecom a couple of years ago: Goldman as the underwriter got a miserly 1 percent fee – which shaved about HK$600 million off Hutch’s costs. Not too bad.
No one cries when bankers get squeezed. But it’s hard not to feel for the little guys – the suppliers who can scarcely do business in town without having to cut a deal with some tentacle of the Li Ka-shing empire, be it electronics, food, cosmetics, flats or electricity. One small example: consider the bakery St. Honore, which has sold cakes and breads in Hong Kong for decades. A natural extension of its business would be to vend its products through the dominant local grocery chain – but that turned out to be a tough way to make a living. If you want to get food into Park’N Shop expect to earn pathetic margins, and to wait forever to get paid.
There is no community better acquainted with Hutch/CK’s famous parsimony than the property contractors. Imagine if you were an interior decorator, and you got the contract to furnish and fit out the high-falutin’ Oriental Plaza – one of the first luxury modern luxury developments in Beijing. Great gig, huh? Not until they pay you only half the fee and tell you to buzz off.
The man who oversees the process of finding builders for the group’s developments is Victor Li, the older of Li Ka-shing’s two sons. His cost-cutting skills are legendary. Here’s one of his most common strategies: call for tenders for a property development; ring up the company that has offered the second-to-last best price; tell them, “someone else has bid lower than you, would you like to adjust your bid”; after they get the reduced bid, they call the guy who was originally the cheapest and say, “we’ve got one bid that’s cheaper, would you like to lower.”
Cheung Kong is certainly not the only penny-pinching developer in Hong Kong. But Hutch/CK is one of the best at the game, and its above-average profit margins attest to this fact. While buyers do not expect Italian marble – or even reliable doorknobs -- when writing a check for a CK/Hutch flat, they do feel a certain security in going with a big name. The group’s strongpoint is building up a buzz through marketing hype, creating the critical mass that makes speculators willing to gamble.
The Li flagship seems to have outsmarted itself, however, with its two most recent feats of cheapness in China. The scandal in Beijing’s Greenwich luxury villas was quickly followed up with another one in second-tier city of Chongqing. Homeowners who signed up to buy units in the “Beverly Hills” luxury development first began suspecting trouble when the project wasn’t finished in time. But when they finally did move in, they discovered the heating didn’t work in the winter – nor the air conditioning in the summer. The materials were shoddy – even the walls slanted.
“We had paid 20 percent higher than the other projects in Chongqing for Beverly Hills lured by the brand name Hutchison Whampoa,” a Mr Yang told a reporter for the South China Morning Post. “We bought what we thought was a Burberry shirt but it turned out to be a local brand and the buttons dropped on the first day.” Cheung Kong is being sued for compensation from homeowners at both developments. Even if its wins the case its reputation will be sullied.
Hong Kong’s most successful developers got to where they are today by making houses as cheaply as possible and then unloading as much supply as possible when the city’s famous speculative bubbles reached fever pitches.
It would be nice to think they’ll have less luck with this strategy in China. Funnily enough one of the most admired projects in China is the revival of the Xintiandi neighborhood through Vincent Lo’s luxury development. Lo is the chairman of Shui On Land, which was once barred from Hong Kong government contracts after it botched a piping job at a housing estate – as residents learned when sewage began spurting from their faucets. Rather telling that this is the group now holding up the reputation of Hong Kong developers in China.