Sunday, December 13, 2015

PEU Business Shift a Chinese Parable.

Bloomberg reported:

Plastic Christmas trees had been the Kao family's great moneymaker for years when Francis Kao told his father in 2001 that things could only go downhill from there.

Overlooking their 10,000-worker factory, Kao pointed nearby to the newly built campus of up-and-coming Huawei Technologies Co. as the symbol of the future.

"The high-tech industry is right by your side, but you're still sticking to the status quo," Kao recalls saying to his father, Michael. "How can the workers you employ stay cheap and the company continue to be successful now that service companies are hiring?"

The next year, in a complex and controversial deal the Carlyle Group bought in, and the Kaos reinvented themselves.  "I have never regretted leaving the Christmas tree business," Francis Kao said.

Meanwhile, labor costs in China have more than quadrupled since the 2002 decision by the Kaos. Services eclipsed manufacturing in 2012 to make up the largest chunk of China's economy.

For Carlyle, the Boto purchase didn't fare well. It exited the business about 6 years after its investment after years of rising labor and raw materials costs.
Washington Business Journal reported on a new Carlyle fund focused on Asia.

The D.C.-based private equity giant The Carlyle Group(NASDAQ: CG) is opening up new investments in Asia with a fresh $235 million investment fund, according to recent Securities and Exchange Commission filings.

The Carlyle Asia Structured Credit Opportunities Fund-A LP was first formed on Dec. 5, 2014, but closed its year-long pooled investment funding round on Dec. 4, 2015.
The new fund will package corporate debt into securitizations.  What looks good one moment can look awful ugly later.  Let's hope Carlyle's fund avoids the Botos, the Kao's Christmas tree company Carlyle lost to receivership in March 2008, just days before Carlyle's Guernsey based $22 billion mortgage security fund collapsed.  There may be lessons for investors today in this PEU parable.