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UPDATED: June 4, 2007 NO.23 JUN.7, 2007
A Real Fixer Upper
As foreign venture capital pours in, China's home improvement industry begins a new round of reshuffling
By GAO YULEI
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"Today, Chinese companies listed on NASDAQ are diversified, no longer limited to the IT industry," said the venture capitalist. "But they share one thing in common: all of them are from industries with a stable size witnessing sustainable growth."

Despite the fact that the home improvement industry has a market potential of 1.2 trillion yuan in China, statistics from the Home Improvement Industry Association indicate that more than 30 percent of enterprises in the sector are losing money, 60 percent are at the point of bankruptcy, and only a few companies are profitable.

"The injection of international capital is good news for resource consolidation in China's home improvement industry," commented Tian Yun, President of the Jiahe Jiamei Group. "But the availability of funds does not necessarily mean good days for everyone. On the contrary, acquisition always follows. Quick fish will eat slow fish and big fish will eat small fish to make the strong brands even stronger."

Dongyi Risheng Managing Director Chen Hui said he did not see bright prospects for the entire home improvement retail industry despite the fact that his company had secured a large investment.

"Only the leading companies in every industry get the attention of international capital," he said. "With the influx of venture capital, the industry will see a series of reshuffling, and small companies will scarcely survive."

Chen believes fund-raising has brought his company more than money. "Advanced management, abundant information, as well as talent pool enrichment-that is more important for the company's future," he said.

Any enterprise that is expanding upward or downward in the home improvement industrial chain must aim to achieve economy of scale to win venture capital investments. After investing in an enterprise, the venture capital firm will put forth demands and suggestions from an international standpoint to upgrade the operating and management standards of the enterprise, including team nurturing, financial structuring and investment decisions.

Finding a niche

How Chinese enterprises should react as international heavyweights and capital tycoons enter the domestic home improvement industry is a question on many insiders' minds.

"If home improvement super-marts in Beijing sprouted and expanded irrationally from 1990 to 1998, then since the late 1990s they have been carving their own uniqueness," said Tian Yun, summarizing the development history of Beijing's home improvement supermarts.

"The number of chain super-marts does not reflect the strength or success of an enterprise," said Tain. "The key is whether the store has the uniqueness to attract consumers. Otherwise, the more chain supermarts there are, the bigger the risk of failure."

When an industry has matured to the high-caliber stage, it needs extra capital to redistribute and reconsolidate its resources. The intervention of venture capital has brought Chinese home improvement enterprises the chance to make themselves more international. After playing the game for a sufficient period of time, domestic home improvement enterprises will be able to compete with each other over talent, innovation and technology instead of price advantages.

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