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China To Float Or Not To Float Case Solution & Answer

China To Float Or Not To Float Case Solution

Introduction

The Chinese economy revalued its currency by 2.1% in the fiscal year July 2005, by adjusting its fixed exchange rate regime towards market based exchange rate system (Laura Alfaro, 2006). Alcatel, global communications provider firm with headquarters based in France, had its operations in China, which faced a strong competition from the local manufacturers. Though the Chinese government had its stake in the company, but it remained unclear that how and through what the Alcatel Company would recover its growth in a highly competitive and difficult market of China. This report aims at measuring the effect of Chinese Yuan appreciation over the operations and the profitability of Alcatel Company and its local competitors, including: Huawei and ZTE.

Problem Statement

Alcatel Company, which had its headquarters in France, had entered into the Chinese telecommunications market after recognizing it as a good investment opportunity, Though the company is supported by the government, as 50% of the stake in the company is owned by the government entities, but the company is prone to fierce competition from the local Chinese telecommunication companies including Huawei and ZTE. In addition, the Chinese government had decided to uplift the Chinese currency by 2.1%, which would affect the telecommunication operators differently. What would be the effect of currency appreciation over the sales, profitability and the cash flows from operations of the Alcatel, Huawei and ZTE? What are strategic initiatives, which need to be taken by the Alcatel Company in order to revive its growth positions and to remain firm in a highly competitive market of China?

Company Background

The Alcatel Company was initiated as a General Electricite in 1988. The company enjoyed a leading position in providing the telecommunication service to Internet access providers, Telecom operators, public sector and the businesses. The company listed on the New York Stock Exchange and the Paris Stock Exchange in the fiscal year 2005, in which it reported the annual sales revenue of $15 billion, with an operating income of $1.4 billion (See Appendix 1).

The company started its operations in China in 1983, when it initially invested funds in the Shanghai Bell, which helped it in becoming the first company with a foreign investment in the telecommunications industry. The company had invested more than $1 billion in China by the end of the fiscal year 2005, as a result of which it expanded to thirty one provinces throughout China and became a local telecommunication suppliers to all the four Chinese telecom operators. However, in 2002, when China started the globalization of its telecommunications industry; the Alcatel Company decided to shift its headquarters from Sydney to Shanghai, which wasthe first move taken by a foreign company in the Chinese market.

With the government cooperation and stake, the Alcatel Shanghai Bell was established, in which the Alcatel Company held an equity stake of 50% plus one shares, which after consolidation, contributed to 10% of the total Alcatel sales. The primary advantage for the Alcatel Company was the investment of the government in the Alcatel Shanghai Bell, which made Alcatel company able to compete with the local Chinese manufacturers in a highly competitive market. Being Chinese in China, is the greatest benefit enjoyed by the company in marinating a competitive position in the telecommunications market.

Competitive Profile

The Alcatel Company had been facing strong competition from the local competition, which mainly include the state owned Huawei Technologies and ZTE (a Hong Kong listed company). Huawei had its international presence in almost 90 countries. In 2004 the company had sales revenue of $3.8 billion with a net income of $0.6 billion. Huawei had been aggressively adopting international expansion in order to make its competitive position string globally. The Chinese government supported the company in its international expansion by offering a credit facility of $10 billion from the state owned China Development Bank.

The other key competitor of the Alcatel Company in the Chinese market was ZTE, which was listed on the Hong Kong Stock Exchange and the Shenzhen Stock Exchange. The ZTE Company also focused on providing the telecommunications related services and equipment. During the fiscal year 2004, the company had a sales revenue of $2.6 billion. It became an important supplier of telecommunication equipment and services to the developing world, just like Huawei………………………..

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