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In China, Newspapers Can Still Thrive

December 19th, 2011 1 comment

Newspapers, as everyone knows by now, are a crummy business, being slowly but surely pounded to death by two major forces they can’t control. First, news is now available for free, instantly, online. So, no need to wait for – and pay for — tomorrow’s newspaper to find out what’s happened today. At the same time, Google and Craigslist have created a far more efficient, and generally far cheaper,  form of advertising online than traditional print advertising.

On the whole, it’s a very gloomy picture. But, there is one new newspaper business model that not only goes from strength to strength, it will likely continue to make big money for many years to come. It’s the free newspapers distributed on subway and metro systems. The first one appeared in Sweden in 1995. Shenzhen, where I live, this year got its first entrant, called “地铁早8点”( “8 O’clock” in English). These free newspapers seem inoculated from every pathogen that is killing off the big urban newspapers around the world like the New York Times, LA Times, Le Monde, South China Morning Post. 

Start with the fact they are free. That certainly makes it easier to find readers. Next, there’s guaranteed, efficient and low-cost distribution. In the case of 8 O’clock, the paper is handed out by reps or left in big piles weekday mornings at many of Shenzhen’s 137 subway stations. Based on my daily subway commute, I’d say the newspaper is now being read by well over 60% of the people on my morning rush-hour train. The newspaper is bulging with ads. By any standards, this is a both a business success and a repudiation of the notion that print newspapers are sledding towards extinction.

The key to success for 8 O’Clock is knowing who its readers are and what they want to read about. 8 O’Clock, like most free subway newspapers, attracts mainly under-40 office workers. They have very clear editorial tastes, and these differ in some key ways from the many newspapers that are now headed for the boneyard. For one thing, 8 O’clock doesn’t try to break major stories or even stay current on political or economic stories fighting for headlines elsewhere. Instead, it offers its readers a mix of brief articles about celebrities, sports stars, oddball “human interest” tales and the occasional local scandal. Around half of each page is pictures, either advertising copy or outsized art work accompanying the short articles.

8 O’Clock is owned by the biggest traditional newspaper publishing company in Shenzhen, called Shenzhen Press Group. It has ten other newspapers in Shenzhen, all using the conventional paid-circulation model. This offers some obvious traps for Shenzhen Press Group, most obviously in selling a product at newsstands with some strong similarities to the one it’s giving away for free in subway stations.  But, against that, Shenzhen Press Group is reaching people with 8 O’clock that most likely never buy paid-for newspapers. What’s more, Shenzhen Press Group already has an in-house advertising team and deep knowledge of the local market to sell ads efficiently in 8 O’Clock. A full-page color ad sells for around USD$25,000-$35,000, depending on the day of the week and placement. Readership is somewhere around 300,000 a day.

Beijing, Shanghai, Shenyang and Guangzhou all have their own free subway newspapers. All seem to be thriving.  Other countries also have them, including US, UK, Germany.

China is the ideal place for free subway-distributed newspapers to thrive. Start with the fact, of course, its cities are huge and subway ridership dwarves that of most Western cities. But, as important, the newspaper industry in China is relatively new. Chinese aren’t imprinted in the way that so many Americans and Europeans are about what newspapers are for. The popular ones see themselves, unashamedly, as for-profit vehicles: an effective advertising medium. Not as a civic trust.

The editorial goal is to get enough people reading articles at the top of the page to deliver big audiences, efficiently, for the advertisers renting space at the bottom. For 8 O’clock, the advertisers are mainly large auto brands, hospitals, realtors and big chain stores all of whose businesses are thriving in China’s booming domestic economy. 

In cities like Shenzhen, Shanghai and Beijing, purchasing power, along with property prices, are reaching first world levels. There’s massive net migration into large cities in China, compared with stagnant, or declining populations in most big Western cities. The subway systems are themselves mainly new, with extensive networks – 14 lines in Beijing, 11 in Shanghai, five in Shenzhen, with two more on the way. As the systems grow, so too will the profits of the free subway newspapers like 8 O’clock.

A generation ago, there was basically only one newspaper of any importance and readership in China, the Communist Party’s People’s Daily (“人民日报”).  It’s still published, and has changed little down the years, a slim sheaf of turgid and often theoretical writing barely leavened by photos or ads. Meanwhile, thousands of newspapers and magazines have entered the market with a broad range of content.

All major media in China are still subject to censorship and, in theory, under the control of the Party’s propaganda department. But, 8 O’clock has ample scope to provide what Shenzhen’s subway commuters are after, at a price they can’t argue with.  A financially healthy newspaper serving a financially prospering city– 8 O’clock will keep waltzing compared to the wretched papers in the US and Europe.

Song Dynasty Deal-Sourcing

December 5th, 2011 1 comment

I get asked occasionally by private equity firm guys how CFC gets such stellar clients. At least in one case, the answer is carved fish, or more accurately my ability quickly to identify the two murky objects (similar to the ones above) carved into the bottom of a ceramic dish. It also helped that I could identify where the dish was made and when.

From that flowed a contract to represent as exclusive investment bankers China’s largest and most valuable private GPS equipment company in a USD$30mn fund-raising. It’s in every sense a dream client. They are the most technologically adept in the domestic industry, with a deep strategic partnership with Microsoft, along with highly-efficient and high-quality manufacturing base in South China, high growth and very strong prospects as GPS sales begin to boom in China.

Since we started our work about two months ago, several big-time PE firms have practically fallen over themselves to invest in the company. It looks likely to be one of the fastest, smoothest and most enjoyable deals I’ve worked on.

No fish, no deal. I’m convinced of this. If I hadn’t correctly identified the carved fish, as well as the fact the dish was made in a kiln in the town of Longquan in Zhejiang Province during the Song Dynasty, this company would not have become our client. The first time I met the company’s founder and owner, he got up in the middle of our meeting, left the room and came back a few minutes later with a fine looking pale wooden box. He untied the cord, opened the cover and allowed me to lift out the dish.

I’d never seen it before, but still it was about as familiar as the face of an old teacher. Double fish carved into a blue-tinted celadon dish. The dish’s heavy coated clear glaze reflected the office lights back into my eyes. The fish are as sketchily carved as the pair in the picture here (from a similar dish sold at Sothebys in New York earlier this year), more an expressionist rendering than a precisely incised sculpture.

It’s something of a wonder the fish can be discerned at all. The potter needed to carve fast, in wet slippery clay that was far from an ideal medium to sink a knife into. Next came all that transparent glaze and then the dish had to get quickly into a kiln rich in carbon gas. The amount of carbon, the thickness and composition of the glaze, the minerals dissolved in the clay – all or any of these could have contributed to the slightly blue-ish tint, a slight chromatic shift from the more familiar green celadons of the Song Dynasty.

All that I knew and shared with the company’s boss, along with remarking the dish was “真了不起”, or truly exceptional. It’s the finest celadon piece I’ve seen in China. Few remain. The best surviving examples of Song celadon are in museums and private collection outside China. I’m not lucky enough to own any. But, I’ve handled dozens of Song celadons over the years, at auction previews of Chinese ceramic sales at Sotheby’s and Christie’s in London and New York. The GPS company boss had bought this one from an esteemed collector and dealer in Japan.

The boss and I are kindred spirits.  He and I both adore and collect Chinese antiques. His collection is of a quality and breadth that I never imagined existed still in China. Most antiques of any quality or value in China sadly were destroyed or lost during the turbulent 20th century, particularly during the Cultural Revolution.

The GPS company boss began doing business in Japan ten years ago, and built his collection slowly by buying beautiful objects there, and bringing them home to China. Of course, the reason Chinese antiques ended up in Japan is also often sad to consider. They were often part of the plunder taken by Japanese soldiers during the fourteen brutal years from 1931 to 1945 when they invaded, occupied and ravaged parts of China.

Along with the celadon dish, the GPS boss has beautiful Liao, Song, Ming and Qing Dynasty porcelains, wood and stone carvings and a set of Song Dynasty paintings of Buddhist Luohan. In the last few months, I’ve spent about 20 hours at the GPS company’s headquarters. At least three-quarters of that time, including a visit this past week, was spent with the boss, in his private office, handling and admiring his antiques, and drinking fine green tea grown on a small personal plantation he owns on Huangshan.

I’ve barely talked business with him. When I tried this past week to discuss which PE firms have offered him money, he showed scant interest. If I have questions about the company, I talk to the CFO. Early on, the boss gifted me a pretty Chinese calligraphy scroll. I reciprocated with an old piece of British Wedgwood, decorated in an ersatz Chinese style.

Deal-sourcing is both the most crucial, as well as the most haphazard aspect of investment banking work. Each of CFC’s clients has come via a different route, a different process – some are introduced, others we go out and find or come to us by word-of-mouth.  Unlike other investment banking guys, I don’t play golf. I don’t belong to any clubs. I don’t advertise.

Chinese antiques, particularly Song ceramics,  are among the few strong interests I have outside of my work.  The same goes for the GPS company boss. His 800-year old dish and my appreciation of it forged a common language and purpose between us, pairing us like the two carved fish. The likely result: his high-tech manufacturing company will now get the capital to double in size and likely IPO within four years, while my company will earn a fee and build its expertise in China’s fast-growing automobile industry.