The Humbling Of Jimmy Lai
Jimmy Lai is used to taking long odds and coming out on top. Beginning with a single garment factory in 1975, the Hong Kong entrepreneur then created Giordano, a Gap-like retailer of casual clothes that is now one of Asia's top brands. Later, he challenged Hong Kong's press lords by launching a flashy weekly magazine, Next, and a muckraking newspaper, Apple Daily. They quickly became two of Hong Kong's most popular publications. And unlike other Hong Kong tycoons who kowtow to Beijing, Lai publicly savages Chinese leaders. On one occasion, he attacked former Premier Li Peng as a "son of a turtle egg," the Chinese equivalent of an S.O.B. In spite of a heavy-handed counterattack from the mainland, Lai emerged richer than ever.
So it's no wonder that Lai oozed bravado last year when he unveiled adMart, a direct-marketing business that sells everything from Coke to computers by Internet, telephone, and fax. Sure, he was taking on Hong Kong's retail powerhouses, a duopoly of billionaire Li Ka-shing's Hutchison Whampoa (HUWHY) and the colonial British conglomerate Jardine Matheson Holdings (JARLY). Other retailers hadn't been able to challenge the entrenched giants, largely because setting up brick and mortar stores was simply too expensive given Hong Kong's skyrocketing real-estate costs. Lai figured that a virtual store would solve the problem. Lai boasted that adMart would smash the status quo and bring price relief to local consumers.
"Arrogance." Today, Lai's great e-business revolution has fizzled. After spinning his wheels for 15 months and spending $120 million of his own money, the tycoon has dramatically scaled down plans for adMart. And he's dialing back on Next Media Ltd., his online portal, whose stock has fallen 90% since February. A humbled and bemused Lai, 51, blames his own "arrogance and complacency...I thought I was a smart guy," he says. Instead, he misread the market. "So much money was rushing into the online business, I violated all of my principles in business," he says. He ticks off his three biggest mistakes: a fast, expensive ramp-up, no small-scale tests of his concepts, and overly rapid diversification. "Li Peng didn't get me," muses Lai. "The Internet craze got me."
That's quite an admission coming from a guy who has always had the Midas touch. Now, taking a break from e-business, Lai has turned over day-to-day operations at the portal and his e-commerce ventures to his lieutenants. While he licks his wounds, he's focusing on a new project that is, well, old media: launching a Taiwan version of Next magazine.
Lai has always been restless--happier starting companies than running them. At age 12, the fifth grade dropout sneaked into Hong Kong from the neighboring mainland province of Guangdong aboard a tiny boat and went on to become the city's most irreverent tycoon. A self-taught intellectual, Lai is a voracious reader who says Austrian free-market economist Friederich von Hayek was his intellectual mentor. At the same time he's very down to earth and is beloved by employees and friends for his no-strings-attached generosity. Employees at all his companies split monthly bonus pools totalling 20% of that month's profits. Along the way, the once-penniless immigrant boy has built a fortune worth about $500 million.
His journey started with a piece of chocolate. The first time Lai heard of Hong Kong was when he was growing up in the poverty and austerity of post-revolutionary China and someone gave him an imported sweet. That first taste of another world sparked his desire to make the dangerous dash across the border to the freewheeling capitalist enclave. Once there, Lai's ambitions soared. He saw that people who spoke English got ahead, so he learned it by painstakingly reading a dictionary when he had time to spare at the knitted-glove factory where he did odd jobs.
Since then, he's had a knack for turning what looked like bad luck into good. In 1994, after he assailed Li Peng in print for his role in the Tiananmen Square massacre, angry Chinese officials stymied Giordano's expansion in the alluring mainland market by literally shutting down shops. Lai's response was pragmatic. He decided to sell out. Turns out it was a timely move. He sold his stake near the peak of the market for Giordano shares, pocketing $187 million in 1996, the year before the Asian financial crisis dealt the retailer a blow from which it is only now recovering. He put the money into U.S. stocks and caught much of the powerful bull market of the late 1990s.
Lai used his profits from Giordano and Wall Street to launch his online delivery service in June, 1999. It was a risky gambit. Not only was the strategy untried, but this time he was taking on the biggest players in town. Hutchison Whampoa and Jardine Fleming between them own most of the city's supermarkets, pharmacies, and electronics stores.
Indeed, Lai claims they used their clout in an attempt to shut his business down. He says Hutchison and Jardine warned their distributors not to sell groceries and electronics to adMart--or else. Then they went directly for Lai's wallet--pulling advertisements out of his Apple Daily. Jardine and Hutchison both deny the advertisement cancellations in Apple had anything to do with the upstart retailer or that they pressured distributors to blacklist adMart. Both acknowledge, however, that they met adMart's challenge by boosting advertising, slashing prices, and launching their own me-too cyberstores.
Phony wine. With most normal distributors off limits, Lai was forced to buy from the gray market to fill the shelves in his virtual store. Within four months of its launch, a PR disaster struck. adMart was caught selling counterfeit Mouton Cadet wine--an incident that Lai's competitors exploited with full-page ads in local newspapers. While Lai blames rivals for some of his his ills, he concedes that he was his own worst enemy. When he first dreamed up adMart, Lai felt that Hong Kong's density would help make his online delivery service cost-effective. Most of the city's 7 million residents live in massive skyscrapers, meaning, theoretically, that one of adMart's distinctive orange-and-white vans could do several deliveries at one location. "So much money was rushing in," reflects Lai. Everyone was talking about "a New Economy, a new way of doing business, how we shouldn't be burdened by the past. Actually it was bullshit." With only 1 million Hong Kongers logging onto the Net, Lai has come to realize there just isn't the critical mass to build many e-businesses in the city.
Now Lai is cutting back. He has shut down big losers, like an online travel service, and laid off staff. Marginal items like snack foods have been taken off adMart's cybershelves. Lai has separated the delivery business--now called EzVan--from the retail business, so that his vans are doing more deliveries for outside retailers. Over the past year, adMart has evolved from a grocery service to one that offers home and office furniture and electrical appliances--things that need to be delivered anyway. Although 40% of orders come over the Internet, wooed by a 5% discount, most of the rest come by phone.
Although the hemorrhaging has stopped, the online ventures are a long way from profitability. Lai's burn rate has improved substantially from $8 million a month to about $2.3 million a month, but combined monthly sales at adMart and EzVan are still only $2.8 million. He figures that breakeven will come in eight months.
Lai is philosophical about money--a luxury that his still-substantial fortune allows. He also takes solace in religion. He converted to Catholicism in 1997 under the influence of his wife, Teresa, a former journalist. Lai generally wakes just after 5 a.m. to read the Bible and do qi gong, a traditional Chinese exercise. Parishioners at St. Teresa's church in Kowloon report that Lai prays fervently during the 45-minute services. "Religion gives me peace of mind and lets me lose myself in something much bigger than myself," he says.
Family is important, too. Teresa, 36, and their two children have grounded a life otherwise in danger of being run by Lai's many impulses. He routinely jets off on family holidays with Teresa, Sebastien, 6, and Claire, 4. Lai enjoys outings in the waters around Hong Kong on the company boat, Free China.
Despite his struggles with e-business, he still has hopes for its future in Hong Kong and mainland China. "The online business is going through a trial and error process," he says. Much like Lai himself.
For a Q & A with Jimmy Lai, go to ebiz.businessweek.com.