Corporate Strategy Design Consulting Report

- 1 -
Strategic re-engineering of XXX Country X

- 4 -
Back-up Acronym list
BoD
CCS
CJV
EJV
FDI
FIC
GDAI
GSHA
JV
KTS
VGM
WFOE
Board of Directors
Competence Center Shanghai
Co-operative Joint Venture
Equity Joint venture
Foreign Direct Investment
Foreign Investment Commission
XXX Flushing Technology (Daishan) Co. Ltd.
XXX Plumbing Technology (Shanghai) Co. Ltd.
Joint Venture
XXX Technical Specialist
Vice General Manager
Wholly Foreign Owned Enterprises
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- 7 -
Country X could be a market of strategic importance for XXX’s international
business(2)
• As the largest construction industry in the world, Country X presents an immense potential for XXX’s piping products.
Both HDPE and Mepla possess significant product advantages over the currently used Country X products. However,
the significant price gap could be a serious barrier for a deep market penetration. For Pluvia, the opportunities are very
attractive. Presently more than 15 roof projects, altogether 700,000 sqm are in different phases of the process of bidding
• Both XXX’s concealed cistern and Pluvia roof drainage system are mismatched with Country X traditional industry habits,
this can only be solved by a long-term commitment in the Country X market and effective marketing. Due to the Country
X consumers traditional mindset that plastic product are lower priced, Chantier doesn’t have an optimistic market
perspective
• Right now, for most of XXX’s products, the competition is not so tough, which means a golden opportunity for XXX to
become a market leader in Country X. It also means time pressure for XXX. Currently competitors (e.g. Grohe DAL,
Caroma) are gearing up and will become aggressive very soon
Market environment

- 10 -
Financials, organization and processes
• The GM of GSHA lacks leadership. His management style is self-centered. It is widely perceived that he does
not trust the local staff. His personality is not accepted by employees. As a result, there is no motivating
corporate culture, no trust between management team and staff, no motivation and commitment among the staff
and high staff turnover. ( e.g. CCS )
• The official organizational structure, which is changed frequently, is not implemented. Department’s function is
not clearly defined. Some functions ( e.g. HR ) are overlapping and some are not implemented. ( e.g. Marketing)
• The current operation process is production - oriented instead of market-oriented, leading to ignorance of market
demands. The control of the whole process is only on paper and is not followed in reality.
• Although there is no open conflicts between them, the JV partners pursue their own (personal) interests. It is
particularly obvious when recruitment, promotion and lay-off are concerned.
• GSHA is on the brim of bankruptcy. More than 70% of products sold have negative gross profit margin, resulting
in an increase of operating losses in line with increase of sales. The company cannot survive without a
continuous cash injection from the parent company. Although the operating losses of GDAI have been reduced
as a result of improved gross profit margins and increased sales, the financial situation is still critical
There is no leadership at GSHA. GSHA is close to bankruptcy. GDAI
shows positive development trend

- 13 -
A1. Macro business environment in Country X

- 16 -
The key indicators of the first half of 2000 show a strong
confidence in the Country X macro economic trend
• Fixed asset investment hit RMB 754 billion in the
first half of 2000, up 12.1% compared with the
period of last year, among these, the investment of
real estate was RMB 201 billion, up 24.1%
• Sales volume of the retail market reached RMB
1625 billion, up 10.1%, and the disposable income
per urban resident increased by 7.7%
• Foreign trade volume achieved a significant growth
of 37%, amounted at USD 217 billion, among these,
export was USD 115 billion, up 38%, import was
USD 102 billion, up 36%
Key indicators in the first half of 2000 8.2% GDP growth achieved in the first half of 2000
Source: County Information Center
first half of 1999 first half of 2000
3650
3950
+8.2%+8.2%
[Billion RMB]

- 19 -
WFOE (wholly foreign owned enterprise) is becoming a more and
more widely-accepted approach for foreign investment
Composition of FDI in Country X Legal formation of foreign investment
Source: State Statistics Bureau
Back-up
18.5%
7.0%
8.1%
8.3%
7.8%
50.3%
154.8
56.9
European
Union
Japan
USA
Taiwan
Hongkong
Others
23.9
25.6
24.9
21.5
[Billion USD] [Billion USD]
The accumulation of actual foreign
investment to the end of 1999
Actual foreign investment of Jan. ~ July 2000
1%
15%
34%
50%
9.9
3.0
EJV
WFOE
CJV
6.8
EJV: Equity Joint Venture
CJV: Cooperative Joint
Venture
Others
Total: 307.6 Total: 19.9

- 22 -
The total floor space of housing supply has experienced an
average annual growth of 6.5% in the past 5 years, more than 8%
growth can be expected this year
Growth of total housing supply
• Average annual growth of urban residential supply
is 12.7%, which is leading the total growth rate of
6.5%, and will continue to be the growth engine
• Rural residential supply growth is limited due to
slow farmers’ income growth
• WTO entry is expected to stimulate another high-
growth period of office building supply
Trend of housing supply
25%26%25%26%25%26%
41%44%
47%49%51%
48%
24% 25% 28%
30%
34%
26%
1995 1996 1997 1998 1998 2000
[Billion sqm]
+6.5% p.a.
Urban
residential
Rural
residential
Non-
residential
1.46
1.62 1.66
1.71
1.87
2.031)
1): Projection based on the progress of the first half year of 2000
Source: Country X Statistic Yearbook 2000, Country X Construction Industry Yearbook 1999, XXX analysis
+8.5%

- 25 -
The residential floor space supply accounts for 74.3% of the total
housing supply in 1999
Composition of housing supply (1999) Compositions of non-residential buildings (1999)
Back-up
29.8%
44.5%
25.7%
481
559
Rural residential buildings
Non-residential
buildings
Urban
residential
buildings
834
[Million sqm]
30.6%
23.1%
21.6%
24.7%
119
147
Industrial buildings
Office buildings
Others
111
[Million sqm]
Total: 1874 Total: 481
104
Other
commercial
buildings
The group of commercial buildings

- 28 -
Country X government is endeavoring to drive sustainable
economic growth
Open-up
• Continuously adopt the direction market
oriented economy development, the
market will open further
• Prepare for WTO entry to gain more
foreign investment and sell more abroad
Western region development
• To narrow the gap of economic
development between coastal area and
western region
• To create extra domestic market
demand by government direction setting
Sustainable
economic growth
Sustainable
economic growth
Market reform
Domestic market demand driven
• Keep the growth of government’s investment in
infrastructure
• Prioritize the market development of real estate by
issuing out stimulating policies, such as housing
privatization policy, tax cut of housing consumption
• Create consumption market demand by increasing
the pay of government staff 50%, lowering down
deposit interest etc.
• Keep SOE reform at the top agenda of
economic development, to achieve a long-
term solution for a viable SOE business, some
short-term pains may be caused such as a
large amount of workers laid-off

- 31 -
Country X’s western region, a vast land with rich natural
resources, lags far behind national economic development
Overview (1999)Overview (1999) GeographyGeography
Indicator
Income per
capita
Land area
Population
GDP
GDP per capita
Western region
406 USD
SKM 5.4 mn
285 mn
USD 133.2 bn
467.4 USD
As % of national
60%
57%
24%
15%
62%
• Account for no more than 4% of total contracted
and utilized foreign investment
• Rich natural resources such as water, gas, coal,
and ore
The western region consists of 10 provinces:
Shichuang, Chongqing, Guizhou, Tibet, Yunnan
Shangxi, Gangshu, Qinghai, Ningxia, Xingjiang
Back-up
Source: Country X Statistics Yearbook 2000, XXX analysis

- 34 -
11.5% of households have reached monthly incomes of more than
8000 RMB in Shanghai, Beijing and Guangzhou
Segmentation by monthly household
disposable income
5.9%
5.6%
10.5%
23.1%
54.9%
3000-5000 <3000
Target household unitsTarget household units
In the top 3 Country X cities, there exist more
than 1.3 million household units, each of which
earns more than 8000 RMB per month
[Million]
5000-8000
8000-10000
>10000 Top 3 cities Number of Household units
Shanghai
11.39Total
Beijing
Guangzhou
4.91
4.19
2.29
Back-up
[RMB]
Target 1.31
Source: Country X Infobank, XXX analysis

- 37 -
Country X sanitary market is mostly a ceramic market, the annual market
demand of sanitary ceramic reached 43 million units in 1999
Composition of sanitary market demand (1999) Composition of flushing tank consumption (1999)
28.4%
16.2
28.4%
12.3
28.4%
12.3
5.6%
2.4Washbasin
[Million unit]
7.9%
0.97
27.1%
3.31
65.0%
7.98
Non-residential buildings
[Million unit]
Total: 43 Total: 12.3
Urban
residential
buildings
Toilet
bowl
Flushing
tank
Others*
*: Urinal ceramic and squatting toilet
Rural
residential
buildings
Source: National Building Materials Bureau, XXX analysis

- 40 -
Medium to high end segment is leading the sanitary market growth
Source: Country X Infobank, National Building Materiel Bureau, XXX analysis
Volume share of medium to
high end sanitary products
20%
35%
8%
1998 2000 2005
Industry response
• Production upgrade to move the
general industry product
standard to a higher level
• Fierce competition continually
drives consumer value by
lowering down the retail price
Government’s direction
• Aim to upgrade the industry
standard due to environmental
concern
• Built industry competence by
structure optimization
Consumer’s demand
• Growing purchasing power
• Increased demand for sanitary
condition leads to higher
bathroom decoration standard
[Million unit]
39.0 48.5 61.93)
1)
2)
1): The projection based on 2000 Jan.~Aug. market performance 2): The industry target set by government
3): Based on the conservative annual growth rate of 5% : The percentage of medium to high end segment in the market of sanitary ceramic

- 43 -
Country X consumers become increasingly demanding on the sanitary
products
Consumer demands
on sanitary products
Brand image
Product value
Product designing
Functionality
• Flushing effectiveness
• Odor-free, low noise
• Popularity in media
• Emotional benefits
• Aesthetic effect
• New concept
• According to government’s regulations, now
the market only accepts toilets with no more
than 9 liter flush. But for consumer, the
strong sense of water-saving has not
been formed
• The tanks should be guaranteed
leak-free
• Dual flush application
After-sales service
• Warranty on
maintenance
• Ratio of quality vs. price
• Discount offer
The concept of
environmental
friendliness
The strength area for XXX

- 46 -
All the market data and information was collected from multiple sources and
analyzed, and cross-checked by Roland Berger Infocenter
Approaches of external market analysis
On-line
researching
On-line
researching
InterviewsInterviews
Statistical
yearbooks
Statistical
yearbooks
Industry
journals
Industry
journals
Housing supply
market
Housing supply
market
Sanitary ceramic
industry
Sanitary ceramic
industry
Building
material
industry
Building
material
industry
Public info on
market demand
and trend
Public info on
market demand
and trend
Sanitary
system
Duofix
Chantier
Fittings
Public
products
Traps/BWO
HDPE
Pluvia
Mepla
Piping
system
Product lines
Market size
(potential)
Market
segmentation
Market trend Competition
Research focus
Back-up
High priority Low priority

- 49 -
The market for each product category of sanitary system were analyzed under
the following aspects and sequence
Competitive analysis
Market opportunities,
constraints, trends
Market potential for
XXX
Concealed
cistern
Concealed
cistern
Exposed
plastic tank
Exposed
plastic tank
Tank fittingsTank fittings
Public
products
Public
products
Traps/BWOTraps/BWO

- 52 -
Brand consciousness and one-stop solution is the main
consumer purchasing behavior, which is a barrier for market
acceptance
• Consumers are strongly brand
oriented in sanitary product
selection, and the leading
sanitary ceramic providers have
achieved strong brand
awareness
• XXX has not been recognized by
most Country X consumers as a
brand of sanitary products
Brand consciousness One-set solution
• Consumers are used to buying
sanitary products under one
brand, one stop solution, e.g.
XXX’s series of sanitary product,
including toilet, washbasin,
bathtub together.
• There are very few wall-hung
toilet bowl available in the market
to form a set with XXX’s
concealed cistern. XXX is unable
to offer one-stop solution
Duofix End-user

- 55 -
Chantier can be sold in the replacement market and for
squatting toilet, but the room for market development is limited
Existing market potentialExisting market potential
For
replacement
market
For
replacement
market
For
squatting
toilet
For
squatting
toilet
• There exists a quite large
replacement market for toilet set, it
is estimated that around 3 million
toilets will be replaced each year
• No sanitary product providers are
clearly positioned in the
replacement market
• There exists a market size of 1.5
million units per year for squatting
toilet, the majority is distributed in
South and North Country X
• The squatting toilet market will still
exist for a long while, especially for
public toilets.
Limitation for ChantierLimitation for Chantier
• Consumers usually change the
whole toilet set when they need to
replace the flush tank.
• Flushing tank replacement market
can only be positioned at low price.
• The majority of squatting toilets are
connected with pressure valve,
which normally is priced around
100 RMB per piece.
• If the squatting toilets are
combined with a flushing tank, in
most cases, it is high-positioned,
while Chaniter can only be
positioned at the middle height
TrendTrend
• The replacement market will
continually exist and grow in the
coming years.
• Tank fittings and the sanitary
company's after sales service will
be the key players of replacement
market.
• The market demand on squatting
toilet will gradually be substituted
by sitting toilet for the superior odor
free effect and comfort
Source: XXX analysis

- 58 -
WDI and Meitu are the two key competitors for XXX in fittings
business
• WDI was founded in Xiamen in 1993, as an
American joint venture by Mr. Lee who is the
president of the company, a local entrepreneur
with American background
• WDI’s revenue in 1999 reached nearly 40 million
RMB, more than half was sold to American market
• WDI’s customer network contains almost all the top
10 ceramic producers in Country X, such as
American Standard, Toto, Swell, HCG, INAX etc.
• WDI has a strong partnership with Swell, one of
WDI’s subsidiary acted as the sole distributor of
Swell in Fujian province and Shanghai
WDI Meitu
• Meitu is a private-owed business located in
Zhongshang, near to the south ceramic production
centre, Foshan. They are the largest provider of
toilet covers and inner mechanisms in Country X
• Meitu’s revenue in 1999 is estimated at more than
60 million RMB, among these, the fittings business
is more than 20 million RMB
• Meitu’s product line contains the whole range from
low end to medium market. It is growing with a
strong momentum

- 61 -
Fierce competition exists in the market of XXX’s public products
Competitive information
• American Standard is going to launch a new
sensor product positioned at low price later
this year
• XXX’s ceramic urinal with sensor integrated
just newly launched into market, this
threatens XXX’s original channel to sell
public products via XXX’s distributors
Key players mapping
Low High
Low
High
INAX
XXX
XXX
American Standard
TOTO
Solomon
Sloam
Gello
Zhilong
Marketshare
Positioning/Price

- 64 -
XXX competitors are the leading ceramic providers who produce
the traps or BWO in the market segment
Leading ceramic providers Small scale producer
Competition comparison for Traps and BWO
XXX
• American standard, XXX, Toto,
produce the traps and BWO
• A large quantity of small scale
producers produce the low
priced traps and BWO
• XXX’s traps and BWO
• One set sanitary solution within
the same distribution channel
• Metal materials positioned as
high product value
• Price competitiveness
• Broad distribution in mass retail
market
• Product design
• High price e.g. XXX’s BWO
made by brass is priced at RMB
500/piece, more than expensive
than XXX’s
• Poor design and quality • High price
• Plastic material is not favored by
Country X consumers
• Limited distribution channel

- 67 -
A3. Market analysis of piping system

- 70 -
Pluvia, as a siphonic roof drainage system, has overwhelming advantages for
large scale and complicated roof design compared with the traditional system
in Country X
Gravity driven roof drainage system
Pluvia roof drainage system
• Superior rainwater drainage
functionality
• Horizontal rainwater collection
piping, do not need roof declination
• Fewer pipes needed
• Less work load for pipe installation
• Significant advantage for use in
large scale building
• Traditionally, drainage by gravity is
used 100% by Country X architects
• Comparatively low efficiency in
water drainage
• Complex large scale roof design
• More work load of constructionThis document is a partial preview. Full document download can be found on Flevy:

- 73 -
Lack of industrial standard on the siphonic roof drainage system is the main
external barrier on the road to Pluvia’s success in Country X
• Siphonic roof drainage is
a totally new concept for
Country X construction
industry, most of the
architects and engineers
lack product and
engineering knowledge
• No industrial standard
exists in design, budget,
installation, project
inspection
Lack of industrial standard:
Land of success

- 76 -
XXX’s piping system possesses significant advantages in product features
compared with local products in Country X
Water supply pipeWater supply pipe Water drainage pipeWater drainage pipe
MeplaMepla
Existing
Country X
market
Existing
Country X
market
• The existing Country X market is mainly
a galvanized steel pipe, also exists some
small local brands of composite pipes
and cheap fittings
• Comparatively low standard on product
quality
HDPEHDPE
Existing
Country X
market
Existing
Country X
market
• Country X now is mainly a PVC country
for waste drainage system, though some
regional difference exists, cast-iron pipe
is still widely used in North
• Fast and easy installation
• Corrosion resistant
• Numerous fittings
• Tight and firm compression connection
to the fittings
• Combines the advantages of metal and
plastic pipes
• Extremely resistant to chemicals,
solvents and radioactive waste water
• Withstands extreme temperature
• More abrasion resistant than metal pipes
• Impact resistant and flexible, never crack
or break
• Complete range of fittings

- 79 -
If XXX can achieve 20% market share in siphonic roof drainage, and 0.1%
share in the water pipe market in Country X by 2005, an annual revenue of
RMB 69 million will be delivered
PluviaPluvia HDPE and MeplaHDPE and Mepla
Accessible
market
Accessible
market
• It is estimated that siphonic roof drainage system
can exploit an annual market of more than 5 million
sqm by year 2005
• With a conservative 3% growth rate, the total
demand of water pipe will reach 580 million meters
in year 2005
• The target exploiting market is defined at the top 1%
of construction projects, with an annual size of 5.8
million meters
• Assuming that XXX achieve 20% of market share
Target
share
Target
share
• Assuming that 10% of the target market can be
changed to use HDPE and Mepla
Business
potential in
2005
Business
potential in
2005
• RMB 40 million revenue will be generated from
Pluvia at the average price of 40 RMB per sqm in
year 2005
• RMB 29 million revenue will be created by the sales
of HDPE and Mepla in year 2005
The XXX’s business potential of pipe products in Country X in 2005 can be targeted at 69 million RMB

- 82 -
B1.1 Corporate strategy analysis

- 85 -
In general, GDAI’s strategy is more simple and in the right direction
Position
Product
Channel
Brand
Medium to high end
Tank fitting products
OEM channel
Premium brand
Strategy as original De-facto situation
High end achieved, medium end
in development
Incomplete product range in the medium end
segment
Through OEM selling to ceramic providers
High reputation among industry

- 88 -
The differentiation strategy that could be applied to XXX Europe can’t be
successfully implemented in Country X
Premium
technology
&
innovation
Premium
quality
Premium
customer
services
Premium
brand &
reputation
Differentiation strategy
(High pricing)
XXX (Europe) XXX (Country X)
Technology is considered as advanced
Quality is regarded as reliable
Customer services are not satisfactory
Brand awareness is low
+
+
-
-This document is a partial preview. Full document download can be found on Flevy:

- 91 -
B2 Sales & Marketing

- 94 -
Each of XXX’s distributors has its own channel orientation, focusing on retail
business or project sales
Project Retail
Gegerit‘s
top 10
distributors
Xiamen Hai Sheng
Shanghai SEC
Guangzhou Hua Run
Shenzhen Xin Yue
Shanghai Zhong Xin
Nanjing Jin Lin
Beijing Jie Xin Te
30%
70%
Retail
Project
National channel
sales structure

- 97 -
GSHA has no clear retail coverage target
• XXX lacks clear planning of
retail network development
• Product distribution target is
missing (sell what product to
which distributor according to
their strength and weaknesses
• Regional practice varies
significantly, both in terms of
retail coverage and product
distribution
Problem Outcome

- 100 -
There are a number of factors affecting XXX’s retail sales
Factors affecting
• Signigicant differences from region to region
• GSHA does not provide enough display board, lighting
boxes and product catalogue to distributors
• XXX image shop/counter concept hasn‘t
been implemented (initiated by Mr. Schuette)
• Poor marketing support
• For same products, there are noticeable
differences among distributors even in the
same city, along the same street
• Certain products pricing too high (Chantier,
BWO&Traps)
• XXX distributiors have limited knowledge
of XXX product know-how, installation and
application technology
• Intensive training is a must
• The selection of toilet bowl to combine
with Duofix or Chantier varies region by
region
• Distributors select toilet bowls
themsleves
Product display Pricing
Merchandiser training Product combination (Chantier, Duofix)

- 103 -
B2.2 Project channel GSHA

- 106 -
The fact that both staff and distributor lack technical know-how and receive
poor technical support from GSHA application and services department leads
to difficulties in selling Pluvia
“XXX‘s technical engineers can‘t even answer my questions. How can I handover big project to these
inexperienced people …”
— one design architect in Xian, Northwest Country X
“I feel very disappointed with application and services department of GSHA. I have spent more than
thirty thousand RMB on building-up relationship, and I lost the tender just because XX couldn‘t give
design drawing to architect on time…”
— one distributor of XXX in Nanjing , Jiangsu province
“I have never seen a company who refused doing such kind of big business. I don‘t understand …”
— one distributor in Shenzhen, South Country X
“Frankly speaking, I don‘t understand Pluvia and personally I do think it will be difficult for me to be in
charge of Pluvia selling …”
— one sales staff in South region
Example Example: Pluvia

- 109 -
There are a number of factors hampering current sales operations of GDAI
Current problems
• Do not understand clearly customers‘
needs
• Unsatisfactory product
development/customisation
• Slow market responsiveness
• High price hinders sales
• Lack of communications between XXX sales
staff and OEM clients

- 112 -
B2.5 Benchmarking: XXX (Country X)

- 115 -
XXX’s distribution channel strategy is divided into four stages with retail
market sales as the strategic focus for the future
ContentContent
• Focus on project sales
in five star hotels in
Country X
• In co-operation with two
distributors
- one in Shanghai, one
in Hongkong
• Dominate high end
hotel sanitary market
(around 90% of market
share )
• High brand awareness
in hotel Industry
Project sales stage
I
Project sales stage II
Project/retail sales
III
Retail/project sales
IV
• Expand into four star
hotels, government
institution buildings,
business buildings
• Set up national
distribution network
• Increasing brand
awareness and
reputation
• Increasing market
share
• Significant efforts put
into development of
retail distribution
network (due to
shrinking project
business )
• Projects on-going
• Increasing brand
awareness among end
users
• Focus on retail market
sales
• Grab more market
share
OutputOutput
Current stage FuturePast Past

- 118 -
KTS selection
• Selection of KTS personnel should be from XXX distributors and get approval from technical
manager of XXX Country X
• From the beginning, one distributor can only have one KTS. Afterwards, more KTS can be added
Technical
manual
• Detailed XXX technical manual will be provided to KTS in the time of technical trainging
XXX works closely with distributors to set up KTS system to improve pre and
after sales services (1)
KTS system analysis
Technical
support to
KTS
• Technical support staff from XXX representative office in Guangzhou, Beijing, Shanghai can
provide KTS with suggestions, information support or even in-field support if requested
• Only for those technical problems that can‘t be solved can KTS contact technical staff of XXX
Country X
Technical
information
• KTS is responsible for setting information database using related handouts, technical manual
and CD-ROM from XXX Country X

- 121 -
XXX as a brand is not well recognised in brand-driven Country X while XXX
has successfully set up itself as a premium brand
• High end brand
• Well recognized
XXX (Country X) XXX (Country X)
• Very few people outside the industry have
heard of XXX
• Not yet well-recognized
• Slogan
– “THE BOLD LOOK OF XXX”
• Slogan
– “Modern sanitary concept” (in Country X)
“Modern sanitary
concept”
Advanced American
sanitary products

- 124 -
C1.1 XXX Shanghai

- 127 -
Company's liquidity situation is deteriorating. Current liabilities are increasing
much faster than current assets, the cash injection from the parent company
is used to cover the running expenses in stead of building up assets
Development of liabilities & assets
[RMB ‘000]
11,507
14,007
15,720
4,075
15,358
25,350
98 99 2000(1-7)
Current ratio
Quick ratio
2.82
1.71
0.91
0.43
0.62
0.25
Current assets
Current liabilities
Source: Balance sheet XXX (Shanghai), XXX analysis
+37%+37%
+522%+522%

- 130 -
The accumulated losses till September 2000 are 86% of share capital. Left
alone the company will be insolvent by the end of this year
Net income losses(1997.12~2000.09)
[RMB ‘000]
5,420
41,426
35,677
9669
10177
10411
97(7-12) 98 99 '00(1-9) accumulated
losses
Share capital
Source: P&L XXX (Shanghai), XXX analysis
86%

- 133 -
The disproportional increase of operating expense results in the increase of
operating loss in spite of the improvement of product mix
19,299
18,379
15,012
1998 1999 2000*
+29%+29%
146.9%146.9% 118.1%118.1% 130.4%130.4%
Total operating expenses 1998~2000
[RMB ‘000]
* Estimation
% of sales

- 136 -
Increase operating expenses results in increase of operating losses in spite of
the improvement of sales
Back-up Profit & loss statement XXX (Shanghai)
1998~2000 [RMB ‘000]
1998 1999 2000 (1~12)
Sales
Cost of materials
Gross profit
personnel expenses
Energy/maintenance
Depreciation
Marketing expenses
Administration expenses
Other operating expenses
Total operating expenses
Operating profit (loss)
Net income
10,219
4,938
5,248
6,810
1,236
178
185
5,767
836
15,012
(9,764)
(9,669)
100.0%
48.3%
51.4%
66.65%
12.1%
1.7%
1.8%
56.4%
8.2%
146.9%
(95.5%)
(94.6%)
15,568
7,521
7,853
9,345
1,670
1,781
1,238
4,722
307
18,379
(10,526)
(10,177)
100.0%
48.3%
50.4%
60.0%
10.7%
11.4%
8.0%
30.3%
2.0%
180.1%
(67.6%)
(65.4%)
14,801
8,003
6,640
9,608
1,522
1,988
1,320
2,317
2,544
19,299
(13,735)
(14,656)
100.0%
54.35%
44.9%
64.9%
10.3%
13.4%
8.9%
13.7%
17.2%
130.4%
(92.8%)
(99.0)%

- 139 -
GDAI’s sales have continuously improved, and cost are reducing; the inter-
company sales increased much faster than to third party
2) Including write-offs for obsolete materials: 1 million RMB & other unclear accounts
Sales development
[RMB ‘000]
Operating losses development
[RMB ‘000]
12%
29%
31%
69%
71%
88%
1998 1999 20001)
+136%+136%
+36%+36%
1) Estimation
(8,561)
(10,706)
(6,490)
1998 19992) 20001)
-24%-24%
+74%+74%
3284
4451
7763
Third party
Inter-company
Source: XXX (Daishan)

- 142 -
8.8%8.8% 24.3%24.3% 48.2%48.2%
Short-term interest bearing debt increased nearly 4 fold, leading the short-
term liabilities increase by 123%. This amounted to 68.5% of total assets by
the end of July, 2000
Liabilities Development
Liabilities Development,
98-00 (1-7)
9,259
14,251
20,642
1998 1999 2000(1-9)
+123%+123%
[RMB ‘000]
Short-term interest-bearing debt
development 98-00 (1-7)
2,480
7,027
14,549
+487%+487%
1998 1999 2000(1-9)
[RMB ‘000]
% of total
assets
% of total
assets 32.9%32.9% 50.2%50.2% 68.5%68.5%

- 145 -
C2. Organization & processes

- 148 -
In GSHA, XXX and Lida have not integrated well from the foundation of JV.
This creates a lot of internal conflicts and management chaos
GSHA
Lida XXX
• Corporate culture
• Management style/skills
• Product lines
• Markets
• Work style

- 151 -
C2.2. Management structure

- 154 -
The general manager can not gain necessary and correct data from the company
for decision-making
Main problems of data/reporting
• No control of data input
(e.g. no cross check in
the warehousing)
Data input
• A lot of useful data
aren’t available (e.g.
scrapped product report)
Data processing
• No strict control system
(e.g. no comparison of
actual cost and standard
cost)
• Data is only for
document, not for
analysis
Data controlling
• Too high figures in
budgeting and sales
forecast
Planning
Poor quality decision basis

- 157 -
C2.3. Key process analysis

- 160 -
In GSHA, process control in production system is inadequate, leading to high
production cost
Production planningProduction planning
PurchasingPurchasing
• Imprecise sales forecast figure from sales department and too many “Daily Sales
Order”lead to difficulties in arranging the production schedule and purchasing. This least
to high inventory level and delivery delay
• No MIS for purchase plan leads to high amount of storage or shortage of some
materials
• No evaluation of suppliers leads to high price and poor quality
• Selection and review of suppliers are all done by purchasing department which leads to
difficulties for further improvement
• Frequent change of suppliers leads to unsustainable quality and high waste ( e.g. PVC)

- 163 -
In GSHA, the main problems in the process are unsuitable process structure,
inefficient process control and the huge differences between document-based
process and the real process
Non market oriented processes
Lack of control in the whole process chain
Efficient implementation of required processes
Inefficient and ineffective operation
+
+
=

- 166 -
In Country X, as far as foreign investment enterprise is concerned, there exist three
main restructuring categories
Restructuring of
investment projects
in Country X
Restructuring of
investment projects
in Country X
Turnaround of JV Equity structure
restructuring
Withdrawal

- 169 -
At pre-selection stage, turnaround, sell out equity and freezing can be
eliminated with killer criteria
Pre-selection
Country X
Partner in?
Killer criteria
Solve key
problems
Secure future
success
Pass? Remarks
I. Turnaround
II. Equity structure
restructuring
- Equity buyout
III. Withdrawal
(1) Sell out equity
(2) Termination
(3) Bankruptcy
(4) Freezing
Yes
No
Yes
No
No
Yes
No
Yes
No
Yes
Yes
No
No
Yes
No
Yes
Yes
No
No
Yes
No
Yes
Yes
No
• It’s very hard to implement future
integration and consolidation without
full control the board of directors
• XXX gains full control
• It’s almost impossible to find a buyer
• It opens the way for a new start
• It opens the way for a new start
• Freezing will ruin XXX’s relation with
local government, thus causing
potential hurdle for future presence
and trouble to GDAI

- 172 -
Key statement from some former GSHA employees on Mr. Cai (1)
• There is no cooperation between two partners from the very beginning. Mr. Cai said " we make this joint venture
bankrupt in 3 years. We can restart again by ourselves." " It does not matter that XXX is losing money in Country X. It
took XXX 10 years to make profits overseas, it needs the same time in Country X as well. Anyhow, it is XXX's money. "
Mr. Cai has extensive network in the industry but he does not use it for XXX products. In contrast, he introduced the
business for other companies that have close relationship with him.
• All the important decisions regarding personnel recruiting are made by Mr. Cai. Mr Schuette does not and is not able to
influence these decisions. Some of these decisions are against XXX's interests, for example, some Country X
employees intend not to do the work properly and some key persons in key positions are not qualified, such as
production, stock control, CCS etc.
• The control system in the company is totally scrapped. At the beginning of the joint venture, about RMB600K machines
and 100 moulds were lost without any record. The warehouse only checks the book records rather than real goods. As a
result there is difference between the book number and the real amount. This is especially serious on the incoming raw
materials. They suspect that some financial accounts, especially done by Mr. Chang daohua, are false. The so-called
scrapped products and the waste raw materials are sold in a not transparent way, i.e. no specific price and no invoice.
The responsible person is appointed by Mr. Cai. Due to the poor control system in all areas waste is high. Auditing is
extremely necessary.
Back-up

- 175 -
The reason behind Lida products’ sharp decline is the change in government
policy on residential building construction and the shrinkage in low end
sanitary ware market
GovernmentGovernment
• The original policy that required all welfare
residential building to have sanitary ware (low end)
included at construction stage is invalid
• Welfare house allocation system is disappearing
Shrinkage of low end marketShrinkage of low end market
• House decoration becomes a popular consumption
trend
• Medium and high end sanitary ware products’ brand
awareness improved which increase brand
sensitivity substantially
• Consumers with growing purchasing power are
turning to medium and high end sanitary ware
products
Back-up

- 178 -
D.2.1 Equity buyout

- 181 -
An equity transfer agreement must cover the following contents
Back-up Equity transfer agreement
• Name, address and legal representative of both the transferor and the transferee
• Shares and price of the transferred equity
• Date and way of equity transfer
• Right and responsibilities of the transferee
• Consequences in case of violation
• Applicable laws and conflict resolution
• Validation period and termination of the agreement
• Date and place of the agreement singing

- 184 -
Generally speaking, termination is unfavorable to Country X partner, however,
it can be used in some cases to achieve the foreign partner’s objective very
quickly (personal incentive)
Explana-
tion
Explana-
tion
TotalTotal
CriteriaCriteria CostCost
• Employee
dismissal fee:
USD 100,000 ~
USD 360,0001)
• Audit firm:
USD 20,000
• Tariff return:
USD 19,000
• Personal incentive
13
9
,
00
0
~
39
9
,
00
0
USD
13
9
,
00
0
~
39
9
,
00
0
USD
RiskRisk
• Lida is not willing
to sell out equity
• Dismissal fee
dispute
• Government’s
concern on
unemployment
- to ---- to ---
• Negotiation period
- max 2 months
• Termination period
- within 4 months
TimeTime
3
~
6
months
3
~
6
months
IntegrationIntegration
• Under current
situation, providing
Country X partner
agrees,
termination can be
the most favorable
option for XXX but
it’s very hard to
reach agreement
with Country X
partner without
incentive terms
++++
1): Whether to take Lida employees’ service time in Shanghai Lida into account results in different amount of employee dismissal fee

- 187 -
In view of cost, time, risk and future integration, bankruptcy should be the last
choice for XXX
Explana-
tion
Explana-
tion
TotalTotal
CriteriaCriteria RiskRisk
• Can’t get
government
approval
• Lida’s opposition
• Dismissal fee
dispute
• Negative press
• Lose everything
including:
investment loan,
account receivable
and staffs
------
TimeTime
• 6~18 months
(Although the
Country X’s
Bankruptcy Law
provision that the
liquidation should
be completed
within 6 months,
many cases
actually last for
more than 1 year
6
~
18
months
6
~
18
months
IntegrationIntegration
• Complicated
process to keep
the business
running
• To transfer
equipment to
Daishan or
Ningbo could be
very difficult
--
CostCost
• Employee
dismissal fee:
USD 100,000 ~
USD 360,0001)
• Audit firm:
USD 20,000
• Law firm:
USD 20,000
• Tariff return:
USD 19,000
15
9
,
00
0
~
41
9
,
00
0
USD
15
9
,
00
0
~
41
9
,
00
0
USD
1): Whether to take Lida employees’ service time in Shanghai Lida into account results in different amount of employee dismissal fee

- 190 -
D.2.4 Comparison of the alternatives

- 193 -
D3. Feasible scenarios

- 196 -
However the organizational structure for scenario I should be aimed for as
XXX’s future structure in Country X
No agreement
Agreement on
termination
Agreement
on buy out
Close Ningbo Ningbo as headquarters
Scenario I
Fall-back
Scenario II
GDAI
Re-open
Re-open
GSHA

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