Will Kodak Get Lucky In China?

Maybe--if Beijing lets it team up with Lucky, the national brand

Yu Lingtao is a popular man. When he opened his small photo shop in mid-1993 in the upscale Beijing suburb of Fangzhuang, customers hurried in with their undeveloped rolls of locally made Lucky film. Yu printed the snapshots on Lucky photographic paper. Then, a Fuji Photo Film Co. salesperson came knocking. With the Japa-nese company's help, Yu turned his shop into a Fuji outlet and started developing photos with Fuji paper and chemicals.

But two years later, Yu's shop got a new look. Down came Fuji's green logo, and up went the red-and-yellow Kodak sign. Thanks to a $2,000 enticement from the Rochester (N.Y.) company, Yu's store became one of some 2,000 Kodak affiliates in China. "They offered me more," says the dapper Yu.

Sweeping up small Chinese entrepreneurs is just one of the aggressive tactics Eastman Kodak Co. has employed to seize a 41% share of China's fast-growing $250 million market for photographic film. Now, Kodak hopes to shift into overdrive and plow some $375 million into manufacturing, including a tie-up with now struggling China Lucky Film Corp. That would enable Kodak to avoid China's 60% duty on imported film and dominate what is expected to be the world's second-largest film market in a decade. And for state-owned Lucky, whose market share has plunged from 24% to 7% since 1994, it could mean rescue from ruin.

CAUSE CELEBRE. A classic win-win situation? Not the way Chinese nationalists see it. While terms of the deal have not been disclosed, they fear that allowing Kodak to manufacture locally will mean death for another major Chinese brand. As a result, activists are seizing on Lucky as a cause celebre in a campaign to beat back the advance of multinationals. Now before the powerful State Council, the Kodak case is caught up in a national debate over whether the government should prop up domestic producers--or whether foreign investment should be permitted at all in some consumer industries. Some opponents of the deal even assert that Lucky should be preserved on the grounds of national security since China's military is a major customer.

The verdict of Chinese consumers seems clear. They overwhelmingly prefer Fuji and Kodak despite the government's best efforts. Because of high duties, an estimated 65% of film and photographic paper sold in China is smuggled in through a thriving gray market. The government bars foreign companies from manufacturing film locally or owning retail outlets. And because policies change constantly, says Koji Yokota, managing director of Fuji Photo's Beijing office, "the road ahead is hard to see in China."

Still, Kodak is accelerating. For the past two years, its army of 500 marketing employees has been signing up an average of three new exclusive retail affiliates a day by offering shopkeepers discounts on supplies and financial help to renovate. With sales growing by 55% annually, Kodak hopes to overtake Fuji, whose market share now stands at 50%. "China is one of the key growth markets for us," says Kodak China Chairman Patrick T. Siewert.

CLOSELY WATCHED. But the big prize would be the proposed joint venture with Lucky. First, it will take a while for the furor to die down. Local media, for example, allege that Kodak and Fuji dump their products in China. The foreign companies say that's ridiculous, noting that their film and paper are 50% more expensive than Lucky's. Nevertheless, a lobby led by the National Association of Light Industry is urging the government to provide $240 million in cash and low-interest loans to rescue Lucky while maintaining a ban on joint ventures in film manufacturing.

With the case also being watched closely by the foreign business community, Chinese leaders don't want to do anything rash. When Premier Li Peng visited Lucky in mid-July, he didn't mention the Kodak bid. But Li did say foreign investment should be considered. No decision on the venture is expected until after the crucial 15th Party Congress this fall, if then. "The whole question has become a very sensitive matter," says one official at the Chemical Industry Ministry, which is responsible for overseeing Lucky. If the ruling goes against Kodak, investing in China may not be a pretty picture for lots of multinationals.