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Thursday, August 24, 2006

Trouble In China: Wal-Mart And Kodak

Stocks: (EK)(WMT)

China is the pot of gold at the end of the rainbow for may US companies. With sales growth slowing in the US and Europe, a number of companies have turned their hopes and investment dollars to the huge Asian country.

IBM recently annouced that it would open four offices a year in mid-sized cities in China to take advantage of sales opportunities and technology talent.

The risk that the Chinese government and Chinese companies will play by rules different than those that US companies are used to in other markets has begun to become more evident.

Kodak's dispute with its Chinese partner, Lucky Film, appears headed for more contentious negotiation. According to Reuters, Lucky has been distributing photo paper which bears a strong resemblance to Kodak's best selling product in China. The logo on Lucky's paper is similar to the logo on Kodak's product. The Lucky paper is, of course, less expensive. Kodak owns 13% of Lucky, but its attempts to get the cheaper product off the market, which have been going on for two years, have yielded no results.

Kodak is a company in deep trouble. It has been laying off workers and restructuring for years. Wall St investors have abandoned the company and its stock trades at $20, down from $45 five years ago. The company is not in a position to weather many more disappointments.

At the other end of the spectrum is Wal-Mart, one of the most successful companies in US history. Wal-Mart was forced to unionize its workers in China recently. The company has about 30,000 "associates" there. While the action may seem benign at first, it puts a Chinese government backed union in the middle of Wal-Mart's plans for it operations in the company. Then, according to Reuters, the Chinese communist party opened its first "branch" in a Wal-Mart store. More are almost certain to come, and Wal-Mart has to ask itself what role the Chinese plan to play in its operations. This is, of course, in stark contrast to Wal-Mart's US operations which have no unions allowing Wal-Mart a broad measure of control over its employees.

Wal-Mart's sales have slowed in the US and same-store sales increase here now run only about 2%. Wal-Mart has sold its German and South Korean operations due to problem penetrating those markets and making them profitable. This puts more pressure on the retailer's success in China. And, the more the government increases its involvement with Wal-Mart employees, the more that the company potentially loses a measure of control there.

China may be a huge market, but, it may not be a huge opportunity.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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