Failure Isn’t Final in China (III): Morgan Stanley and Expedia.


This is the third in a series of articles on companies that have had difficulties in China. However, in many cases, they later came back and won, often spectacularly.

In Part 1, I detailed how Carlsberg beer and Danone both initially struggled in China. But Carlsberg later came back with an impressive success in the far West. In Part 2, I detailed how Ford and Fiat both also initially struggled. But in the past several years, Ford has been showing impressive sales across China.

In this article, I look at Morgan Stanley and Expedia. I find Morgan Stanley’s China story pretty inspiring. But first Expedia, which is more complicated.

Expedia in China

Expedia entered China in 2005 with the purchase of a 55% controlling stake in Chinese travel site eLong. And Expedia basically did everything right – including:

  • They positioned themselves against big China trends: rising consumers, surging travel (both domestic and international) and e-commerce.
  • They got to the market early and had a first mover advantage. Back in 2005, the Chinese Internet was still in its infancy. And this was also +5 years before Chinese consumers would really start traveling and spending.
  • They got to scale in a business with strong network economics. The online marketplace for hotels (not plane flights) quickly collapsed to a handful of dominant giants. And Expedia, via eLong, was one of these big winners. Qunar and ctrip were the others.
  • In 2011, they purchased an additional 8% of eLong from Renren for $72M. This took them to 62% ownership.

It all looked pretty good. So why in 2015 did they sell their entire eLong stake for $671M?

My assessment is that they got tired of losing money. The online travel market of China is ferociously competitive. eLong was frequently losing money and impacting Expedia’s overall returns. In the most recent quarters before Expedia’s exit, eLong was still periodically losing around $20M per quarter.

This is an example of “last man standing”. Competitors in China will often ramp up spending on capacity and price subsidies – and everyone begins losing money. The market then becomes a contest of who is willing and able to lose the most cash. In the end, whoever is “left standing” gets the market. Uber China and DidiChuxing recently had this same situation.

So Expedia won big in China and became one of the three major players. But they were still losing cash after ten years of work. And it appears they eventually had enough. They sold their stake in eLong, much of which was then purchased by ctrip. Ctrip is now expected to show a significant margin expansion.

Morgan Stanley and CICC

CICC (China International Capital Corp) was launched in 1995 as a joint venture between Morgan Stanley and China Construction Bank (i.e., People’s Construction Bank of China). For Morgan Stanley, this was their single largest investment in an emerging market to date ($35M for 34.3% ownership). And it was their primary strategy for becoming a player in China’s domestic capital market.

The joint venture was very successful. CICC has gone from the 40 employees at launch to over 4,200 employees today. Revenues in 2015 were over 9B RMB.

However, Morgan Stanley sold its stake in CICC in 2011 – and had been trying to sell as early as 2008. There are various reasons for this, including the financial crisis and dealing with limits on how many banks / JVs a foreign company can have in this sector in China. But underneath this was also the fact that CICC was no longer an operational vehicle for Morgan Stanley in China. It had become mostly a passive investment.

So what happened?

My standard question for any company in China is “what is your advantage or value-add to your partner?”. Good answers to this can be technology, foreign customers, a well-known brand, and cross-border operations. But my follow-up question is always “and how long will this advantage or value add last?”. This is the question that usually catches companies.

A lot of the joint venture stories you hear are after one partner’s capital, expertise or technology has already been transferred. A declining value-add by a partner (on either side) can easily lead a break-up or to one party getting pushed aside. Your ongoing value-add is what really keeps you in the relationship.

For Morgan Stanley and CICC, this happened quite quickly. The first group of investment bankers were trained. The importance of foreign capital declined. Morgan Stanley had added a lot of initial value but then more or less stopped having a significant operational role and became more of a passive shareholder.

This type of result would have been fine if they were a venture capital firm (they made a very good return on their $35M). But this was not their primary goal as an MNC looking at the China market long-term.

Post Break-Up, Morgan Stanley Keeps Rolling.

However, this situation did not really slow Morgan Stanley down. Investment bankers are pretty clever.

  • In 2006, Morgan Stanley became the first foreign bank to receive a wholly-owned commercial banking license in China.
  • In 2008, they created a trust joint venture, Hangzhou Industrial and Commercial Trust. They also partnered with Huaxin Securities to form a fund management company, Morgan Stanley Huaxin Fund Management Company.
  • In 2011, they established a RMB private equity investment management firm.They also partnered with Huaxin Securities to create Morgan Stanley Huaxin Securities.

And all of this was done under some fairly strict limits on what foreign banks can do in China.


The bad news is, yes, China is a difficult and often brutal market. Struggle is, in fact, very common. The good news is that the market is so big and dynamic that you can almost always try again. So keep trying. Don’t give up. But wear a cup.

Thanks for reading. Cheers from Beijing, – jeff


I write, speak and consult about digital strategy and transformation.

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