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.
1
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).
2
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.
3
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.
4
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.
5
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.
6 While he
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?
Credit:ivythesis.typepad.com
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