Q1. Why did SIA failed to buy into CEA? Any suggestions?

SIA, short for Singapore Airlines, is Singapore’s flagship airline and its hub is located at
Singapore Changi Airport. SIA is invested by the Singapore government and controlled by
Temasek Holdings. Singapore Airlines was the launch customer for the Airbus A380, the largest
passenger aircraft in the world - as well as the Boeing 787-10 and the ultra-long-range version of
the Airbus A350-900. CEA, China Eastern Airlines Company Limited, also known as Eastern
Airlines. This is China's main airline, operating international, domestic, and regional routes. Its
main hubs are located at Shanghai Pudong International Airport and Shanghai Hongqiao
International Airport. It is also China's second-largest passenger airline after China Southern
Airlines. Now, I would like to talk about why SIA failed to buy into CEA. This is a perfect deal,
and it has been approved by the top China government. Singapore Airlines (SIA) and its parent
company Temasek (Temasek) Holdings will buy 24% of Shanghai Eastern Airlines. In many
ways, this is a win-win situation. China Eastern Airlines, known for its poor service quality and

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unprofitable, will acquire the management expertise of Singapore Airlines, an airline known for

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its first-class passenger facilities and management. Singapore Airlines will use Shanghai's second

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hub airport, and Shanghai passengers can also enjoy China Eastern Airlines' improved services

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and facilities. However, a transaction that everyone was optimistic about failed in a week.
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Through Singapore Airlines’ parent company, Temasek Holdings, a 7.16 billion Hong
Kong dollars (US$918 million) acquisition offer will enable Singapore Airlines to acquire 24%
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of Shanghai Eastern Airlines at a price of 3.80 Hong Kong dollars per share. The offer is for
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China Eastern Airlines' newly issued H shares listed in Hong Kong. After Singapore Airlines'
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investment has been approved by the China government, China Eastern Airlines only needs the
final approval of shareholders before the acquisition. In the three shareholder meetings held by
China Eastern Airlines, China Eastern Airlines’ minority shareholders rejected the proposal to
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sell to Singapore Airlines and Temasek Holdings. The reason is that the Hong Kong China
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National Aviation Corporation (CNAC), which has the same parent company as China
International Airlines (National Aviation Holding Co.), promised to acquire shares of China
Eastern Airlines at a price of at least 5 Hong Kong dollars per share. This is 32% higher than
Singapore Airlines’ offer of 3.80 Hong Kong dollars per share. The Singapore Airlines
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transaction was rejected.

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The government situation also changed dramatically before the shareholder

meeting. The view that the government had decided to change its strategy
for overhauling the airline industry was bolstered when former CNAC and
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Air China chairman Li Jiaxiang was promoted to head the General

Administration of the Civil Aviation Administration of China (CAAC), the
Chinese aviation regulator.

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 “Whereas his predecessor was more in favor of greater competition, Li
Jiaxiang is well known as a supporter of consolidation in the Chinese airline
industry,” said Li Lei, an aviation analyst at China Securities Co. in Beijing.

Besides, before the start of the General Meeting of Shareholders, when Li Jiaxiang, the
current chairman of China National Aviation Group and Air China, was promoted to the director-
general of the Civil Aviation Administration of China, he supported the government’s decision to
reform the aviation industry strategy. Prior to this, Li Jiaxiang had publicly proposed to create a
China "super airline" that could compete with foreign airlines. He expressed his hope that
through expansion and cross-shareholding with other domestic airlines, Air China, the company
he once chaired, will be transformed into a super airline to compete with Singapore Airlines and
other overseas competitors.
The "veto" vote at the general meeting of shareholders is the latest step in the extremely
fierce battle between Air China and AVIC. The battle is to undermine the cooperation plan

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between China Eastern Airlines and Singapore Airlines, and this has been approved by the State

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Council (Countser) of China. Singapore Airlines and Singapore’s state-owned investment agency

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Temasek’s quoted price of 3.80 Hong Kong dollars per share represents a 36% premium over the

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average 30 days before the stock transaction. The trading price of Singapore Airlines' Shanghai

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stock rose nearly six times due to the soaring China stock market. This resulted in a huge gap
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between Singapore Airlines’ offer and the market price, making this transaction unacceptable to
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shareholders. However, Singapore Airlines has always refused to increase its offer. Outdated
Chinese nationalism is also one of the reasons. China is a country with a strong sense of
nationalism. Therefore, selling state-owned assets to foreign companies is a delicate issue for the
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China government. Although the China government wants to be open to foreign investment, on
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the other hand, the China government does not want to sell the assets of China's companies to
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foreign companies, giving them an excuse to enter China's market.

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I would now like to talk about the entry mode in China. It has the Foreign Direct
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Investment and Other Foreign InDirect Investment -FDI, including equity joint ventures,
cooperative joint ventures, wholly foreign owned enterprises (WFOE), foreign companies
limited by shares (FCLSs), cooperative developments (CDs) and other. Other foreign investment
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includes share trading, international leasing, compensation trade, and processing and assembly,
which is equivalent to the category of foreign indirect investment in the hierarchical model
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illustrated in the previous section.

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（下一个 slide) In my opinion, WFOE is a good way to enter the China market. Because it is
independent and has the freedom to implement the worldwide strategies of its parent company
without having to consider the involvement of the Chinese partner. It also has the ability to
formally carry out business rather than just function as a representative office and being able to
issue invoices to their customers in RMB and receive revenues in RMB. Capability of converting

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 RMB profits to US dollars for remittance to its parent company outside of China. Protection of
intellectual know-how and technology are provided. For Manufacturing WFOE, no special
requirements for Import / Export license for its own products. Last but not least, it has a full
control of human resources and greater efficiency in operations, management and future
development. According to WFOE regulations, "Foreign investors are permitted to set up a 100%
foreign owned enterprise in industries that are conducive to the development of China’s
economic benefits, and not prohibited or restricted by the Chinese government." The Catalogue
of Guidance to Foreign Investment" categorises fields of potential investment as "prohibited,"
"restricted" and "encouraged". It is advisable to fully comprehend the interpretation of these
categories.

(下一个 slide) In China, Business scope of a business is a "one sentence description" covering all
of the present and future activities of the WFOE; it is essential this encompasses every envisaged

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scope of future activity. The WFOE can only conduct business within its approved business

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scope, which ultimately appears on the business licence.One of the most important issues in

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WFOE application is business scope. Any amendments to the business scope require further
application and approval. Business scope of a company in China is not as broad and general as in

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other countries. Generally business scope includes investment consulting, international economic
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consulting, trade information consulting, marketing and promotion consulting, corporate
management consulting, technology consulting, manufacturing and so on.
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 Question:

Q2. Is it a good decision for McDonald to give up control over business in China
(Mainland & Hong Kong)?

On 2017, Mc Donald’s is selling off most of its China Business about 80% in a deal worth as much as
$2.1 billion dollar to Citic and the Carlyle Group
Citic is a vast Chinese state-owned conglomerate with interests in businesses ranging from energy and
manufacturing to real estate which takes the majority stake in McDonald’s operations in mainland China
and Hong Kong. While US private equity giant The Carlyle Group, which buying into the investment

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combo, taking a 28% stake. McDonald's will hold the remaining 20% of the business.

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This business transaction is the latest move by McDonald’s CEO Eastbrook as to reform the global burger

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chain.

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So, what are the changes we can see is: In the United States, McDonald has introduced more customized
sandwiches with advanced ingredients, introduced all-day breakfast to the menu, and is equipped with
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touch screens and table service.

Slide 6
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For now, they have given control to china as they know that "menu innovation" and the use of digital
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technology are the top priorities of China's new business. But, there was a case occurred on July 2015,
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which McDonald has discovered to be using expired and contaminated chicken and beef which lead their
reputation to fall down. However, China has strict requirements on the level of food hygiene control.
When McDonald’s transfers the management power to China, it will need to improve food hygiene
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control, in order to increase brand reputation and customer trust, and even help to expand the market.
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So, Eastbrook think that the introduction of CITIC and Carlyle can actually help them to achieve their
goal is to open more than 1,500 new restaurants in China and Hong Kong within the next five years, with
a focus on introducing gold arches into smaller cities in China.
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Slide7

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Slide8

Citic focus on 3 key areas. The first one is menu innovation. The company provided more local-style
breakfast products and desserts, which have been brought to the market between 2018-2020. Also, in
the first and second tier cities, sales are mainly driven by wage earners’ breakfast and lunch demands;

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 while in the third and fourth tier cities, sales during weekends, holidays and at tea-time will be more
important. So, since Citic is focusing on the third and fourth tier cities, they paid more attention to the
menu.

Slide9

The 2nd key area is they enhanced restaurant convenience. When Citic newly have the control in 2017,
Mcd’s was lagging behind KFC in terms of store count in China, so they invest heavily and expand
aggressively. They use their “combined expertise and resources” to accelerate growth. They open new
restaurants particularly in tier 3 and 4 cities. Citic also allowed Mcd to refurbish old restaurants to
improve sales performance in existing restaurants, which is an expensive thing to do.

Slide 10

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The 3rd key area is Retail digital leadership and delivery. Since the acquisition until now, Mcd had

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expanded fast into online delivery. More than 1/5 of Mcd China’s overall revenue on the mainland came

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from delivery. While >1000 new stores have been added since its acquisition in 2017. Same store traffic
and same store sales also recorded positive growth for three consecutive years.

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Slide 11

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Slide 12

Let's say McDonald's doesn't make money from catering, why? Because McDonald's has two business
models: first one is “Direct Store Model” which revenue came from the sale of fast food, this, model only
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contain 10% of whole McDonald’s revenues. second one is called “Franchise Model” which means
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franchisee pay the money to McDonald's, and, this model contains 50% of McDonald’s whole revenues.
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Slide 13
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McDonald's founder Ray Kroc said: “My business is actually real estate.” Let me explain how it works.
Firstly, McDonald's can drive the surrounding and increase land prices, because as we all know,
McDonalds always try to increase quality of foods, therefore, they will have positive reputation and
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become popular, that’s why they can impact land price. Besides, locations they choose are very precise,
because McDonald’s has long time experience with choose locations. Then, McDonald’s will try ti sign a
long contract for twenty or thirty years. At the same time, they will try to attract more franchisee by
lower costs, so they can earn money by rent the stores to the franchisees. If you want become their
partner, you need to pay 45,000$as franchisee fees.

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 Slide 14

Let’s continue with “How CITIC can help them save money?” One of comment about McDonald’s is
“They can be more profitable if they are asset light and make money off franchise fees and leave the
heavy lifting to somebody else.” Let me explain what this means, CITIC can have license to access
McDonald’s Trademark & Brand name and right to use McDonald's system and methods, also, the rights
to sell McDonald's products and services. Therefore, CITIC also required to do heavy works like:
Innovation of menu; modernization of stores and increase chain stores, as we all know these works
require large amount of money and time, therefore McDonald's has saved money and time by sell their
operation to China.

Slide 15

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Government help also is an advantage of McDonald’s give up the control.

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In the long term, McDonald's need to aims its business to smaller cities, especially third and fourth tier

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cities. If McDonald’s wants to expand its restaurant and business throughout the country, it needs the
local government help. Citic Group belongs to a state-owned enterprise, that is the organization

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formed by government for taking part commercial activities. Therefore, Partner with Citic can take more
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advantages.
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Slide 16-18
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In conclusion, we thought that McDonald’s gave its control to CITIC group and the carlye group is a good
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decision.

First reason: Localization will make more profits to McDonald’s than operate themselves. Like tailor a
Chinese style McDonald’s menu for the market to let Chinese people get more familiar with McDonald’s
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this brand and establish more restaurant in small mainland cities.

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Do more improvement and updates in the old restaurant to increase the brand reputation and obtain
more loyalty.
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Another reason is saved money and maximize profit. As Nurkuat mentioned, McDonald’s just need rent
the stores to the franchisee and just received the franchisee fee about 45000 dollars. Also, where
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McDonald’s locate, the surrounding land price will go up. Partnership with CITIC also can transfer the
responsibilities and pressure to others. That is all for our presentation
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