Lucky Film Corp, China's only imaging enterprise, is unlikely to shake off its bad luck in the near future, even though it has a joint venture with Eastman Kodak.

Lucky's share price has dropped from 14 yuan (US$1.69) per share one and a half years ago to 3.79 yuan (43 US cents) per share by last Friday.

There is no sign the trend will reverse any time soon.

Hundreds of millions of yuan have been lost on China's bourses in less than two years.

Lucky estimates its profits will shrink about 50 per cent in the year's first half.

Last year, the firm reported 619 million yuan (US$74.76 million) in revenues, up 9.7 per cent year-on-year.

However, the firm's net profit was 78.03 million yuan (US$9.42 million), down 2.5 per cent year-on-year.

Lucky's profits began falling before Kodak acquired a 20-per-cent stake in the firm.

In October 2003, Kodak paid US$100 million to gain a 20-per-cent share in Lucky.

In 2000, Lucky's net profit was 210 million yuan (US$25.36 million). That figure fell to 139 million yuan (US$16.79 million) in 2001, then to 124 million yuan (US$14.98 million) in 2002.

In the first half of 2003, Lucky's net profit was 48.46 million yuan (US$5.85 million), down a record 33 per cent year-on-year.

As a result, Lucky decided to sell a stake to Eastman Kodak.

Under the deal, Lucky demanded it be allowed to maintain majority ownership, control over management and its own brand.

People cannot help but ask three questions: What will it take to save Lucky? Is the joint venture successful? What is in Lucky's future?

Lucky refuses to say if it considers its co-operation with Kodak to be a success.

Li Jianxin, director of Lucky's external affairs department, says the co-operation is "smooth."

"Both companies are responsible. We are strictly following the contract now," he tells China Business Weekly.

Kodak uses the words, "smooth progress" when describing its co-operation with Lucky.

"The two companies have accomplished a lot since government approval of our contract last February," Kodak says in a statement.

"We are proud of our progress so far, and we feel confident in the long-term success of this win-win partnership with Lucky."

Li says it is still too early to see the results of the joint venture.

He adds the lukewarm film market is the reason for Lucky's poor achievement.

"The fast-growing digital business has affected the traditional imaging business in China, just like everywhere else in the world," Li says.

"There are 18-19 joint venture projects under way. We have made the investments, but have yet to gain profits," Li says.

Regarding the falling share price, Li says the sluggish stock market in China has affected the firm's share price.

An official in Kodak's Beijing office agrees. He adds it is natural that Lucky is incurring costs while implementing such large projects, which will strengthen its competitiveness over the long run.

The capital projects are key to the Kodak-Lucky relationship. Under the deal, Kodak is assisting Lucky in building or upgrading its manufacturing capability for sensitised products.

The related technology transfer to Lucky is also well under way, Kodak says.

Kodak's technical co-operation with Lucky will improve the quality of Lucky's products and make Lucky a stronger, more competitive company, according to a recent Kodak's statement..

Under the deal, Kodak will provide Lucky with formulation and process technology to manufacture certain types of colour film and paper products.

The technical documents have been transferred to Lucky.

In addition, Kodak plans to transfer ownership of its Shantou plant to Lucky.

"We will transfer the Shantou plant to Lucky at the end of this month, after the plant is relocated to the Haicang site," Kodak says.

However, experts suggest Kodak will never transfer its core or latest technologies to Lucky, which is still one of Kodak's competitors in the market.

"So, Lucky will always lag behind Kodak in terms of technology," says Wei Huawei, a senior consultant with Beijing Fore-sight Innovation Consulting Co Ltd.

Besides, Lucky not only lags in terms of technology, but, more importantly, is in urgent need of more-advanced management, Wei says.

"Surgery" should be performed on Lucky's management, he says.

"Fresh blood should be injected in Lucky's senior management," Wei says.

Lucky is a publicly listed company, but a large portion of its shares are owned by the State.

Lucky does not have a brand-positioning strategy, Wei says.

Two years ago, Lucky conducted an ad campaign in which it tried to position itself as a provider of cheap, but quality made-in-China products. Lucky targetted the low-end and mid-range markets.

However, the campaign lasted for a short time.

"The company lacked additional moves," Wei says.

"It was a waste of money and effort, because only a consistent and well-designed promotional programme can work."

Low prices are no longer an advantage for Lucky, as Kodak and Fuji Film have begun cutting prices.

Kodak, as one of Lucky's competitors, launched its film and free-camera promotion several years ago.

Kodak has begun eyeing China's secondary cities and vast rural areas. It has begun placing outlets in those areas.

Kodak has more than 9,000 outlets in China, compared with Lucky's 100 shops.

Repositioning is essential for Lucky at the current stage, Wei says.

"The company should start looking for new markets. Meanwhile, it should try its best to win back the rural and countryside market from its foreign competitors.

"Furthermore, it should start eyeing other developing countries, such as those in Southeast Asia."

In emerging markets, such as China, India, Brazil and Russia, there is tremendous potential.

For example, in China, 76 per cent of households still do not own a camera, and in many areas, their first camera will still be a traditional film camera, indicate Kodak's statistics.

The imaging industry is undergoing fundamental changes. Digital imaging is growing fast, which means traditional film imaging is in decline worldwide.

So, the traditional imaging business will be affected by changes that are taking place in the whole industry.

A successful operation requires a company to foresee and prepare for the changing demands within the market.

Wei says Lucky should prepare for the tough road ahead.

Industry analysts suggest Lucky will eventually become Kodak's manufacturing base, and that Lucky's film will disappear from the market.

Kodak's senior officials say the firm does not intend to acquire Lucky.

Kodak's vice-president, Ying Yeh, says Kodak is still Lucky's competitor, and the competition with Lucky will enlarge China's photography market, which is more important than making an acquisition.

Kodak's traditional business has dropped dramatically in the United States and Europe. But it says it will continue to enlarge its business in China.

Lucky Film, founded in 1958, is China's only imaging enterprise. It has 3.4 billion yuan (US$411 million) in registered capital. The company employs more than 8,870 employees.

Lucky is headquartered in Baoding, a city in North China's Hebei Province. The firm went public, on China's A-share market, in 1998.

(China Daily 06/06/2005 page2)