Eastman Kodak announced Thursday that it has signed a US$100 million 20-year co-operative agreement with China Lucky Film Corp, China's only enterprise in the imaging industry.

Analysts say the move will further secure the US imaging giant's presence in China -- the world's second largest film market, and put pressure on Fuji -- Kodak's global rival.

It signals that Kodak is finally out in front in its competition with Fuji to win Lucky co-operation. Fuji had also talked with Lucky over possible cooperation in past years, earlier reports even claiming they were very close to a deal.

According to the new agreement, Kodak will contribute US$45 million in cash and provide an emulsion making line for color products for a 20 percent stake in Lucky Film Co Ltd, the listing arm of China Lucky Film Corp.

Meanwhile, Kodak will provide US$54.5 million and technical support to assist Lucky in upgrading its existing triacetate film base production and coating lines, and give an emulsion and coating line to Lucky.

Kodak also promises to provide manufacturing technology support to Lucky on an ongoing basis to enable it to produce world-class colour products.

According to the agreement, Lucky will pay Kodak for the use of selected technologies, and pay dividends on the shares owned by Kodak.

After the two sides enter into co-operation, Lucky will continue to manufacture and distribute Lucky brand products.

However, the final co-operative contract is subject to the approval of relevant departments of the Chinese Government, according to a press release from Eastman Kodak.

Insiders say the agreement was inked after years of tough negotiation and obviously Kodak made a big comprise because it usually asks for a majority stake when launching joint ventures.

With only a 20 percent stake in the listed company, Kodak has also promised in the agreement not to acquire the company's floating shares in the secondary market.

"This is very likely to be only the first step in Kodak's co-operation with Lucky,'' said Xiao Hanping, imaging industry analyst with China Galaxy Securities. "Even the parent company might become the next acquisition target.''

Officials with Kodak and Lucky said the two companies hope the co-operation will help strengthen their competitive position and presence in new and existing markets, particularly among emerging markets in Asia.

For example, the Greater Asia region, Lucky's primary market, is the world's fastest growing market for photographic film, and China is Kodak's second-largest market for photographic film.

"The agreement reflects current practice in the industry, in which more and more companies are collaborating to achieve specific market goals,'' said a press release from Lucky.

However, the company declined to give reasons why it finally chose to co-operate with Kodak, not Fuji, and Fuji officials have not been available for comment.

A Kodak official said there will be a press conference next Wednesday in Beijing, when more detailed information about the co-operative deal will be disclosed.

Kodak is already the No 1 player in the Chinese film market. In 1998, it signed a US$1 billion contract with the Chinese Government to launch full-scale co-operation with China's imaging industry. That pact allowed Kodak to acquire all of China's enterprises in the film industry except for Lucky.

Now, the rough estimate is that Kodak controls about half of China's film market, with Lucky holding about 20 percent.

Xiao said the new agreement will very likely reshape China's film market.

"Fuji might feel the squeeze if Kodak and Lucky form a sort of price or market alliance,'' he said.

Some experts also expressed the worry that if all of Lucky were to be acquired by Kodak, China would lose its only domestic film brand and Kodak would monopolize the Chinese market.

"The key is what Kodak will do next step,'' said a Beijing-based analyst who declined to be named.

However, Xiao of Galaxy said that for Lucky itself, seeking a foreign co-operative partner is a good choice, because it would be very difficult for the company to seek to further develop by itself, since its technology is not as advanced as that of Kodak and Fuji.

(China Daily October 24, 2003)