China Opening Up

[robertshfl]

December 31, 2001
Total Playing Time: 19 hours 5 minutes

In 1992 we completed the Upstream Business Subgoal which gave us access to all natural resources. At that time we didn’t feel it was necessary to set up any natural resource firms. Now were going to go back in time, see what led us to this decision and try to determine if we made the correct decision or not.

We were only producing the household goods. Chemical minerals, timber, and oil were the only natural resources we would have had an interest in. The timber was used in the manufacturing of the tissues and paper for the washing powder. The oil would be used in the manufacture of plastic for the detergent and the toiler cleaner. The chemical minerals was used in the manufacture of detergent, toilet cleaner, and washing powder.

The seaports is where we sourced the chemical minerals, plastic, and timber from. Quality rating for each was 52, 47, and 47. We had 6 purchasing units for chemical minerals and plastic and two for timber. There was no shortage of supplies.

Each city had one of each natural resource available. Only one competitor had purchased a natural resource, a silver mine. For oil, the quality ranged from 55 to 92 and the cost ranged from $91 million to $130 million. Timber the quality ranged from 60 to 80 and the cost ranged from $33 million to $57 million. Chemical minerals the quality ranged from 57 to 77 and the cost ranged from $83 million to $123 million.

With $34 million in cash on hand and a credit line of $108 million, we wouldn’t have had enough to purchase a mine, oil well, and timber farm at the same time. Chemical minerals would have been the most important one out of the three to invest in. We would have purchased the chemical mineral mine in Beijing with a quality rating of 77 and a cost of $123 million.

In 2001 there were 7 chemical mineral mines in production and two available for purchase. Both had a price premium of 411% and surprisingly the mine in Beijing was still available, if we were willing to pay $632 million for it, we weren’t willing to do that.

In 2001 oil had no price premium factor and two of the original oil wells were still available for purchase. We had set up a plastic factory to supply all our factories that required plastic. We didn’t feel the need to open our own oil well.

In 2001 we had quite the demand for timber. After all it was used in the manufacture of paper and tissues directly and cigarettes, cigars, and washing powder indirectly. Also we lost our source of timber from the seaport and the competitors had their 6 logging camps set to internal sale only. There was 3 logging camps on the open market. We purchased the one in Chengdu that was previously available. The price premium was 171% so instead of paying the original price of $49 million we had to pay $133 million.

We did find one issue quite frustrating. When our original supply of timber was no longer available, we still had timber in our purchasing units but we were unable to see an exact amount, how many pounds, we had remaining. For some of our purchasing units it was almost a year before the inventory was depleted. This was an issue because in some of our tobacco factories we wanted to discontinue manufacturing paper in the factory and purchase paper directly from our paper factory.

So did we make the right decision back in 1992? If I was to do it again I would have purchased a chemical minerals mine as soon as I was able to and when I began the production of cigarettes and cigars I would have purchased a logging camp. I still don’t know if I would have needed an oil well for the production of plastic even with our expansion into products that required plastic.

We take time each year to see if we need to open various retail stores in order to keep up with the demand. In Guangzhou we saw the need and opened a supermarket for the household products and a drug store in April.

In May we opened an additional factory for Handheld Game Consoles and another for Video Game Consoles in Chengdu. We closed out the year with 3 factories for each product which supplied 10 purchasing units for each product.

In August we acquired the technology of plastic from a competitor for $3.7 million. Our tech level went from 13 >> 53 and we set up a medium factory to produce plastic. It was set up with two purchasing units, two manufacturing units and two sales units. All of our plastic needs in our various factories were handled by this one factory without a problem.

In October we set up the logging camp mentioned earlier in this discussion. This was set up with 6 logging timber units, 2 inventory units, and 2 sales units. Training was set up at $43,000 a month.

The end of this year we had 47 retail stores, revenue $1.46 billion and profit $629 million. Number of factories were 27, revenue $620 million and profit $453 million. Our 7 R&D Centers had an expense of $26.5 million. Revenue at our tobacco farm was $6.5 million and profit was at $2.26 million.

On December 31, 2001 we had $1.39 billion in cash, an annual profit of $927 million, a net worth of $4.83 billion, and annual revenue of $2.09 billion.

Our stock price on December 31, 2001 was $2,346 and our market cap was $11.7 billion. Earnings per share were $185.66, equity per share was $967.57, P/E Ratio bumped up to 12.64, P/B Ratio slipped to 2.42. Dividend yield for the year increased to 0.27%.


December 31, 2002
Total Playing Time: 22 hours 35 minutes

What an extremely busy year 2002 was for us. We sold our technology of plastic that we had purchased late last year to a competitor for $3.5 million. Their tech level increased from 12 >> 48. This same company acquired our tech for paper in the month of August. Their tech for paper increased from 12 >> 63 at a cost of $5 million.

January we opened a discount megastore in both New York City and Beijing, also a supermarket in Beijing. February a convenience store and toy store was opened in Guangzhou.

On March 7th, due to the lack of quality 3x3 parcels of land with high traffic ratings, we acquired a supermarket, in Chengdu, from a competitor for $13.1 million. The supermarket had a traffic rating of 45 and we stocked it with our 4 household goods. A few weeks later we opened a new convenience store in the same city.

Under the belief that in order to achieve market dominance in the manufacturing sector we needed to increase our manufacturing capabilities, we looked at our next area of production. This led us to some of the items in the products classes of communication devices, computers, electronic products, and photography products.

With over a billion dollars in cash we decided to acquire tech from our competitors and set up new R&D Centers.

Tech Tech Level Cost
Notebook Computer 0 >> 38 $16.4 million
Camcorder 0 >> 30 $12.8 million
Desktop Computer 12 >> 168 $15.3 million
Digital Camera 0 >> 37 $16.3 million
Compact Camera 0 >> 36 $12 million

We didn’t realize until we attempted production of the digital camera that we needed to have the tech for the compact camera first. That is why tech for compact camera was acquired after digital. We also set up 4 new R&D Centers. One item per center, notebook computer research for one year with a tech gain from 38 >> 66. Digital camera same situation, tech gain of 37 >> 65.

The third factory we had to research the new product of Portable Media Player for 2.40 years. This technology wasn’t available to be acquired from any of our competitors. The last R&D Center was also performing new product research and development for Tablet Computers for 4.81 years.

On May 14th, 21st, and June 10th in the city of Chengdu we opened 3 new large factories producing desktop computers, digital cameras, and notebook computers respectively. In July these 3 goods went to market in our new department store in New York City. One purchase and sales unit for each product with an advertising unit linked to each sales unit. Our COO set the advertising budget at the maximum of $500,000 for each product, $1.5 million in monthly advertising.

In less than a one month time period, one in August, the other in September, we opened two new department stores in Shanghai. Our COO set the advertising budget at $500,000 for all 6 sales units, $3 million in monthly brand range advertising for these two stores.

October we acquired a supermarket in Chengdu for $14.9 million. We immediately demolished the supermarket and built a sparkling new department store.

The demand for notebook computers required us to build another large factory in Chengdu during the month of November. We took the same course of action in December for our digital cameras.

We closed out the year by opening a department store in Guangzhou and Beijing, the only two cities remaining without one of our department stores. Earlier in the year we did make one investment in the stock market with the purchase of $53 million in stock.

In our corporate income statement we did have a write off of $1.87 million. I’m assuming this was connected to the destruction of the supermarket we had purchased. This amount was over half of the $3.2 million in write offs over our 12 year lifetime at that point.

The end of this year we had 60 retail stores, an increase of 13 stores from the previous year. Our revenue went up slightly from $1.46 billion to $1.51 billion. We lost approximately $50 million in profit, dropping us to $579.8 million.

Number of factories increased by 5 to 32, revenue increased to $699 million and profit increased to $501.9 million. We now had 11 R&D Centers that cost us $36 million in expenses. Our tobacco farm remained consistent with revenue of $6.85 million and profit of $2.4 million. Our logging camp gave us a small profit of $1.38 million from revenues of $22.7 million.

On December 31, 2002 we had $1.49 billion in cash but our annual profit dropped by over $100 million to $806 million, though our net worth and annual revenue increased to $5.7 billion and $2.24 billion respectively.

Our stock price on December 31, 2002 was $2,723 and our market cap was $13.6 billion. For the first time in our 12 years of existence our earnings per share dropped from $185.66 to $167.69. Our equity per share increased to $1,139. P/E Ratio leaped from 12.64 to 16.24 and our P/B Ratio continued its small slippage down to 2.39. Dividend yield for the year increased to 0.28%.


December 31, 2003
Total Playing Time: 24 hours 27 minutes

Right out the gates of 2003 we made additional investments in the stock market, acquiring shares in 6 different companies to the tune of $485.5 million.

Understanding the importance of being able to supply our own subcomponents, we acquired the technology for CPU’s and CCD’s from two of our competitors. CPU was acquired for $8.17 million with a tech gain of 11 >> 94 and CCD was acquired for $6.14 million with a tech gain of 11 >> 81. We also acquired the technology for the Smart Phone for $24.75 million with a tech gain of 0 >> 30.

We were unable to acquire the tech for the camera phone from any of our competitors and without that acquired knowledge we were unable to manufacture smart phones. We opened a new R&D unit to research the new product of camera phones, which would take 3.21 months to complete.

We also saw that HUD Glasses were able to become a new product development so we set up another R&D Center for them. Research would take 6.41 years.

It was going to be over 3 years before we could bring the smart phone to market due to our lack of knowledge of the camera phone. We opened a third R&D Center to research the smart phone over the length of 3 years so when we were ready to go to market our tech level would be an impressive 106.

In May we opened a computer store in New York City and Beijing and stocked them with one each of desktop computers and notebook computers. In June we opened our first CPU factory with 3 purchasing units, 3 manufacturing units and 2 sales units. Instead of purchasing CPU’s with a quality of 82 from the seaport for $89.19 we were able to manufacture CPU’s with a quality of 92 and sell them to only our factories at $161.

Micromanaging over 30 factories can grow quite tedious. We felt it was time to make some major changes in our executive staff, it wasn’t that the current staff wasn’t doing a good job, change was needed to reach the next level and accomplish the main goal.

The day before Halloween we discharged Cathy Jakoi as our Chief Technical Officer after 13 years of service. She understood the reason for the discharge but she was not happy in the least. Her severance package did a good job of easing the pain.

Ms. Jako was replaced the very same day by Arnold Parets. Arnold Parets held a 100 rating in the business expertise of home appliances, a good asset to have if we decided to start researching home appliances. His research and development rating was an impressive 80. We did not allow him to change R&D products, which was an area we still felt important for us to manage. We did allow him to set the training budget, after all he has to do something to earn his $52 million annual salary. With his level of expertise all units in our R&D centers were at a level 5.

We set up an office for a Chief Marketing Officer and set the headhunters out to find us one. Abril Fowler joined our firm with a business expertise of 50 in household products. It was his business expertise of 100 in marketing that landed him the position. We agreed upon a salary of $43.2 million and let him decide what products to advertise, which media firms to use, and what the advertising budget would be. We set up the target brand rating bar right at the halfway mark. Since we didn’t own any media firms we told him we had no special preference on what media firm to use.

The most important acquisition was our new Chief Operating Officer. We needed an individual capable and qualified to run the day to day operations of at least our retailing and manufacturing sector. The ability to manage other areas of our company, besides tech and marketing, would just be an added benefit.

After careful consideration and some tough negotiating, we brought in Bill Laprad as the new COO with an annual salary of $81.4 million. Mr. Laprad had a business expertise in the product class of toys of 100. His business expertise in retailing, farming, manufacturing, raw material production, and training was 40 for all of them. Marketing expertise of 80 was his only other area of expertise but we had our new CMO to handle all marketing. By the end of the day Mr. Laprad was put in charge of our retail operations, manufacturing operations, our tobacco farm and our logging camp.

The end of this year we had 62 retail stores, revenue $1.55 billion. For the second consecutive year our profit in the retail stores took another substantial hit, dropping to $491 million, that’s a two year loss of $138 million.

Revenue and profit increased in our factories. Number of factories were 34, revenue $767 million and profit $548 million. Our new CTO was managing 14 R&D Centers with an expense of $50.1 million. Revenue and profit at our tobacco farm saw a significant gain to $9.5 million in revenue and $5 million in profit. Our logging camp continued to grow giving us $27 million in revenue and $2.4 million in profit.

On December 31, 2,003 we had $1.36 billion in cash. Just like our drop in profits in our retail sector, our overall company profit dropped for the second year in a row, down to $686.7 million, total two year decline in profits of almost a quarter of a billion dollars. Net worth was $6.6 billion, and annual revenue was $2.35 billion.

Our stock price on December 31, 2003 was $2,627 and our market cap was $13.1 billion. Earnings per share dropped once again, this year down to $145.02. Equity per share had a slight increase to $1,327, P/E Ratio increased again to 18.12, P/B Ratio slipped once again to 1.98. Dividend yield for the year slipped to 0.25%.

[robertshfl]

December 31, 2004
Total Playing Time: 25 hours 39 minutes

This was the year where we let our executive staff earn their salaries. The demand for our CPU’s required us to set up another factory. This factory was set up differently and over time it gave us higher revenue and higher profits than our other CPU factory. I highly recommend this layout if the product you’re producing requires only one or two inputs.

CPU’s only require the input of silicon so we set up a purchasing unit in the center top row and another in the center bottom row. These two purchasing units were linked to 5 manufacturing units, one in each corner and one in the center of the factory. The remaining two side units, middle left and middle right, were set up as sales units.
We opened our second large factor for desktop computers in June. Even though it was a wide open market with desktop computers it took a while before we saw any significant numbers.

We opened our first mine at the end of July, a silica mine in Chengdu. The quality of the silica was 65, it held 360,000 tons in reserves. With no premium price in place we were able to make the purchase for $70.7 million in cash.

The next month we opened a silicon factory also in Chengdu. Our COO, Mr. Laprad, was in charge of all factories. When we hired Mr. Laprad we had failed to make sure the internal sales only option was checked off in his detail section. As soon as production of silicone began 8 of our competitor’s factories were purchasing silicon from us.

Only 3 of our own factories were making purchases. Our cost + freight for silicon was $0.34lb and we were selling it for $0.44lb. The quality was on the lower end of the scale at 37. We did open another R&D Center in September to research silicon for one year with a tech gain of 10 >> 46.

Looking at the financials for this year was very interesting to say the least. Our retail stores experienced an increase of revenue by almost a quarter of a billion dollars in one year, though our profits continued to decline.

Our factories experienced a huge surge in revenue and profit, $435 million and $391 million. Apparently our COO, Mr. Laprad, must have found the correct strategy for both the retail and manufacturing sectors since our overall operating profit increased tremendously.

The end of this year we had 62 retail stores, revenue $1.79 billion, profit $356 million. Number of factories were 37, revenue $1.20 billion and profit $939.7 million. We added an R&D Center so 15 R&D Centers had an expense of $54.4 million.

Our tobacco farm had its best performance yet with revenue at $17 million and profit at $13 million. The logging camp had $36 million in revenue and $4.55 million in profit. Our new silica mine had revenue of $2.6 million and a loss of $2.6 million.

On December 31, 2,004 we had $1.95 billion in cash, an annual profit of $979 million, net worth of $7.7 billion, and annual revenue of $3.04 billion.

For the first time in history our stock price and market cap experienced a downturn. Our annual return was a loss of 5.19%. Our stock price on December 31, 2004 was $2,462 and our market cap was $12.3 billion. Earnings per share increased by over $50.00 to $196.21. Equity per share increased by over $200 to $1,543. P/E Ratio dropped to 12.55 and P/B Ratio went down to 1.59. Dividend yield for the year was down to 0.23%.


December 31, 2005
Total Playing Time: 28 hours 5 minutes


We began the year investing in the stock market once again. Total investment this time was $195 million.

A benefit of having our COO decide which factory to use to stock our various retail stores is that over time we’re able to analyze the factories and see where another factory may need to be opened to answer any supply and demand issues. After performing this analysis we opened 4 factories from January 30th to March 10th. New York City with desktop computers, a notebook computer factory also in New York, a plastic factory in Beijing, and a portable media player in New York City, the first portable media player factory in our portfolio. We opened a second portable media player factory in Chengdu in the month of August.

The middle of November we opened a convenience store in Beijing. The quality of available real estate was not well. The best location we could find had a low traffic rating of 27. We had the same issue with the opening of a department store also in Beijing.

The end of this year we had 64 retail stores, revenue $1.92 billion and profit $416 million. Number of factories were 45, revenue $1.3 billion and profit $976 million. Our 15 R&D Centers had an expense of $56.8 million. One tobacco farm, revenue $17.8 million, profit $13.7 million. One logging camp, revenue $35.9 million, profit $5.2 million. Our silicon mine still failed to turn a profit with revenue of $1.1 million and a loss of $3.8 million.

On December 31, 1999 we had $2.23 billion in cash, an annual profit of $992.4 million, a net worth of $8.84 billion, and annual revenue of $3.28 billion.

Our stock price on December 31, 2005 was $2,931 and our market cap was $14.65 billion. Earnings per share were $208.87, equity per share was $1,768, P/E Ratio was 14.04, P/B Ratio was 1.66. Dividend yield for the year was 0.28%.


February 16, 2006
Total Playing Time: ** hours ** minutes
[/b
]In January and February we opened 3 factories in Chengdu, one for CDD’s, one for electronic components, and one for camcorders.

On February 16, 2006 we accomplished the Seize the Opportunities (Main Goal) of net worth of $250 million, ours was $9 billion. Annual revenue of $300 million, ours was $3.2 billion. Market dominance of the retailing sector, our market share was 10% and market dominance of the manufacturing sector, our market share of 11%.