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Imperial College Business School

MSc Management
International Business

Primark China - Expansion Plan


Executive Summary

Primark is currently the UK’s second biggest clothing retailer. Established in


1969 in Ireland, the company has grown enormously in size and strength
since its conception. Since the late 1990s, the company has greatly
expanded and now has 193 stores across Europe. Primark offers a great
variety of products including men’s, women’s and children’ s wear as well as
home products. Primark’s business model to sell good quality products at a
low price has proven highly successful in Europe.

In this report, we are proposing a $1billion dollar investment to expand


Primark’s retail operations into the Chinese market. This expansion plan
involves establishing retail stores in key locations across China, building
distribution centres, introducing online retail platforms and expanding
Primark’s already existing production capabilities.

Expansion strategy for China

Overview

We propose to establish Primark’s presence in the Chinese market through


both physical (‘brick and mortar’) expansion and online retailing offering
Chinese young consumers high-quality products at value-for-money prices.

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Target group

The prime target market that has been identified is the middle and low-income
class under 35 interested in fashion trends at bargain prices. According to a
McKinsey survey on China's urban young adults (a segment of about 15
million people), half perceive foreign brands to be of higher quality than local
brands. Similarly, 36 percent of China's young adults say they like to try out
foreign products and brands on a regular basis. They also shop for apparel
more frequently people in other age groups spending larger sums on clothing
and are likely to spend even more as their incomes rise [1].

Mode of entry

As labour costs are relatively low in China, Primark will set up ‘Green Field’
operations rather than establishing a presence through M&A. According to
the Ministry of Commerce, the most common ways of entry for foreign
enterprises into China are Equity Joint Ventures (EJVs), Contractual Joint
Ventures (CJVs) and the establishment of Wholly Foreign Owned Enterprises
(WFOEs). We suggest that Primark chooses the WFOE as its mode of entry.

The advantages are as follows: Firstly, independence and freedom in


developing and implementing strategies autonomously without having to
consult with a Chinese partner. Secondly, the ability to formally carry out
business rather than just function as a representative office and being able to
issue invoices to their customers in RMB and receive revenues in RMB.
Thirdly, there will be no requirement for import-/ export licence fees; and,
finally, the company retains full control over the human resources
development, as well as greater efficiency in operations and management.

Strategy in-depth

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Production and design

Primark already owns manufacturing sites in China. In order to meet the


increased demand, the proposed expansion into the Chinese market,
production capacities would need to be greatly expanded. We propose to
extend the current production contracts to already established manufacturers
in China and, thereby, reducing the risk and expense of building factories from
scratch. Producing products in China will greatly reduce distribution costs
meaning the company could retain its low price level-strategy.

In order to keep up with global fashion trends, customer satisfaction


surveys should be held on a regular basis in order to ensure the products and
their designs meet the needs and wants of consumers.

On average, it currently takes six weeks from the design table until a
product is in the shops.[2] We would seek to reduce the product release-time
down to three weeks for the Chinese market; given that manufacturers would
be in closer range to the distribution centres than before, this would
immensely improve Primark’s competitiveness. Additionally, product sizes
would need to be adapted to ensure they meet the requirements of Chinese
consumers.

Supply and distribution

Primark makes its profit primarily by selling its products at low prices but in
high volumes. In order to achieve a high stock turnover in China, the supply
and distribution of goods needs to be secure, fast and efficient. We propose
to set up two large distribution centres in China which will be used to stock,
process, and supply goods to the retail stores.

Retail store establishment

Naturally, the location of the Primark retail stores will be of great importance in

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creating brand awareness and addressing the appropriate target market. We
propose to set up Primark flagship stores on high streets and shopping malls
which are frequented by young workers and students in first-tier cities like
Shanghai, Beijing and Guangzhou. In addition, we suggest opening a further
flagship store in Hong Kong. In a second stage, we plan to expand the
physical stores of Primark to second-tier cities with high household living
expenditure per capital like Zhejiang, Jiangsu, Fujian, Guangdong, and
Tianjin.

In order to reduce costs while opening a large number of stores in the


shortest amount of time, we propose leasing buildings and floor space rather
than buying them. Retail stores will all have an open, bright and spacious
atmosphere making the stores look welcoming and structured. The
appearance, look and feel of Primark stores and the overall customer
experience will be a key element to succeeding in China.

(Source: State Statistical Bureau)

Human Resources

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Primark will employ people from local communities to work in its stores and
distribution centres in China. This will both reduce employment costs and
ensure employees have a good connection with consumers. Training staff
with the help of training consultants, who are fluent in Mandarin and have a
significant amount of retail experience in Europe, will be major priority for
Primark.

Marketing

At the initial stage of entry to the Chinese market, we plan to invest in local
marketing efforts, even though this is contrary to Primark’s UK strategy.
Unlike foreign retailers like Zara or H&M which were widely known before
entering the Chinese market, the brand awareness for Primark is relatively
low. Adverts should be placed in local fashion magazines, billboards and
‘Metro’ newspaper to create and then raise brand awareness. Further
emphasis will be put on the shops’ window displays.

Metro Express Ruili Fashion

Metro express is distributed freely Ruili is a fashion magazine with a high


everyday in tube stations and is popular circulation and is targeted at young people under
among young white-collar workers. 35, which corresponds with Primark’s projected
target market.

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Online store

We propose to introduce online retailing in the first phase of the expansion as


an additional retail channel. The first online shop should be launched through
Taobao Mall, a highly successful ecommerce platform, and then later be
expanded to create an own Primark online shop. The rationale behind this
approach will be explained in greater detail below.

Growing garment e-commerce

In 2008, the number of Internet users in China has surpassed the US


reaching 253 million. The total amount of consumption through Internet
shopping in China was expected to rise to US$ 85.6 billion by the end of 2008
which is an increase of 47.3% from 2007.

Figure 1: Number of Internet users in China from 2000-05


(Source: iResearch CNNIC, 2006)

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Figure 2: Total amount of consumption through Internet shopping in 2005-08
(Source: DCCI, 2008)

From the above figures, we can see that fashion e-commerce is a fast
growing market with room for future investments. With the increasing number
of people in china choosing to shop online, the market holds a huge potential
for companies like Primark.

Taobao China

For the first half of 2009, Tabao’s transaction volume is reported to be RMB
80.9 billion (US $11.8 billion) which is 97% increase from last year. [3] Many
well-known Chinese domestic brands, but also foreign brands like Dell,
Lenovo, Procter & Gamble and Uniqlo sell their products through online
shopping platforms like Taobao Mall. In July 2009, the official Lenovo online
store was earned more than RMB 10 million, in one month only.[4]

Tabao Mall is mainly used by young middle class consumers, 39% of


which are between 16-25 and 40% of them are between 26-35.[5] This
suggests that a huge share of the users of Tabao Mall are in Primark’s main
target group.

To launch an online store through Taobao greatly reduces the initial costs
and risks in contrast to setting up an own online store.

We believe that online retailing in this form will benefit the company in two
ways: On the one hand, it will help the company to reach customers in all

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parts of the country without setting up costly stores. On the other hand, it will
serve as a database for Primark helping to understand customer behaviour
and preferences of its new Chinese customers.

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Strategy timeline

This report assumes a five-year time line for the outlined expansion plan. The
table below shows a breakdown of goals to be implemented within this
timeframe.

Time Period Strategic Goals


Short term Year 1 • Expand manufacturing capacity

• Build distribution centres

Year 2 • Establish flagship stores

Year 3 • Establish retail stores in Beijing, Shanghai


& Hong Kong

• Cooperate with Taobao to build first online


shop

Long term Year 4 • Establish retail stores in other selected


cities

Year 5 • Implement and launch own online store

Rationale behind the expansion into China

With a population of over 1.3 billion, China is both a production and


consumption powerhouse as well as a low-cost manufacturing centre for
foreign and domestic firms.

Fastest growing economy

China has a nominal GDP of US$ 4.4 trillion (2008) and has had the fastest-
growing major economy over the past 30 years with an average annual GDP
growth rate above 10%. According to research centre of the State Council of
China, an average 7.9% GDP growth can be expected between 2001 and
2010.[6] Making it an ideal destination for many multinational companies.

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Growing middle class

According to McKinsey China’s middle class (defined as those with annual


income of at least US$5,000) has now reached 80–150 million and is still
growing rapidly, creating an enormous market for consumer goods of all types
within a fairly short time-span in the process. China's retail market is worth
RMB8921 billion (US$1302 billion) in 2007 and growing at 16.8% annually.[7]

Apparel industry in China

China accounts for 37.8% of the entire Asia-Pacific apparel retail industry’s
value. The Chinese apparel retail industry grew by 5% in 2008 reaching a
value of $84.9 billion. In 2013, the Chinese apparel retail industry is forecast
to have a value of $106.2 billion, an increase of 25% since 2008.[8]

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Five Forces of apparel industry
Bargaining power of suppliers The current suppliers (wholesalers and manufacturers) are
quite fragmented which weakens the bargaining power of
supplier. Low
Bargaining power of buyers Almost all the buyers are individual consumers and the
fragments consumers as style is an abstract concept that
defines individuals, to an extent, an extension of personality
and therefore highly individualized, which significantly
weakens buyer power. Low
New entrants Entry to the apparel retail industry does not require large
capital outlay; setting up an independent apparel retail store
is within the means of many individuals. High
Substitutes Substitutes for apparel retail include buying direct from
manufacturers; with increasing online purchasing. Other
substitutes include home-made and custom-made (couture)
clothing. Overall Moderate
Competitive rivalry The competition in the current apparel market is becoming
fierce among both domestic retailers and foreign retailers.
Selected key competitors
Domestic brands:
The top two competitors are

Metersbonwe Group is China's leading casual wear


apparel company. The company operates around 1,800
stores across China and has over 5,000 employees. It
targets 18-25 year old male and female consumers.

Natural and simple is the motto of Baleno. The brand


provides a full range of casual wear with the emphasis on
value-for-money for the mass market. Offering competitive
prices and outstanding quality, Baleno holds a significant
market share.

Foreign brands:

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Zara H&M Uniqlo
Year of 2006 2007 2002
entry
No of 35 15 46
stores in (until October (until Sep (until October
China
2009[9]) 2009 [10]) 2009[11])
From the Five Forces analysis, the apparel industry is an attractive industry to invest in with low
bargaining powers for both suppliers and buyers. However, as a new player in the market,
attention must be paid especially to differentiation from competitors.

Low distribution costs

By manufacturing products for the Chinese market in the country, Primark’s


reduced distribution costs will make it possible to extend low prices to
consumers, boosting its competitiveness in the market.

Manufacturing Expertise

As Primark is already producing some of its products in china, it benefits from


an existing infrastructure and expertise. Other foreign retailers like Zara who
have mainly produced in Europe previously, do not have this advantage.

RISK ANALYSIS (PESTEL)

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Political factors

The Chinese retail and distribution sectors have been the last ones to be
deregulated. Modern retail trade did not emerge from under the central
planning system until the middle of the 1990s. Foreign access to the
domestic markets was only granted gradually and many areas domestic
retailers still dominate; many of them with government support.[12]

Subsidised competition, corruption and protectionism hamper foreign


retail investors in all fields and regulation in certain aspects conflicting and
confusing.[13]

Despite increasing liberalisation, the government retains considerable


control in areas directly affecting the retail sector: Advertising rates, for
example, are still state-controlled which makes it more costly to reach
customers than in many Western countries, while the rewards remain lower
since the average disposable income in China still remains lower in
comparison. The index value for GDP per head in power purchasing parity
(PPP) in China is 11.8 (US=100), while for the UK it is 77.1.[14][15]

Economic factors

Despite the political and structural restraints foreign investors are faced with in
China’s retail sector, the general environment for investment is positive and
optimistic against a background of substantial growth over the past years in all
retail formats and sectors. The Chinese GDP has grown 13.7% between
2002 and 2007 and 35 of the world’s Top 50 retailers are now represented in
China. [16][17]

Yet, in spite of a steady and steep economic growth rate, there are some
signs for caution; foreign investors need to bear in mind in order to be able to
understand the dynamics in the Chinese market. Growth is evident, but
where does it come from? In the retail sector, growth mainly seems to stem
from new stores with a consumer price inflation of 5.9% (UK: 4%) and private
consumption making up only for 35% of the GDP. The average in other Asian

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countries lies between 50-60%. The government has now realised this
situation could need some encouragement and has begun to devise some
incentives to boost private household consumption. [18]

The Chinese retail market is vast and complex and, therefore, bears a
multitude of opportunities for investors, but also risks. Its only recent
deregulation and the aforementioned aspects are very likely to be the reasons
why, despite ongoing growth, only 2.6% of total retail sales came from foreign
invested retail operations in 2006 and why exports from the US and Europe
have remained flat in the past year.[19]

In the fashion retail market, the inflow of foreign capital into Mainland
China is a rather recent phenomenon, but, nevertheless, a growing one.
National domestic chains have only started to emerge in the last couple of
years, while, at the same time other foreign fashion retailers have begun
creating a national footprint. Esprit was among the first and now has over 280
concessions throughout China. Giordano, Bossini and Baleno have
successfully expanded from Hong Kong into Mainland China clearly
benefitting from existing joint ventures and some level of brand awareness. [20]

The Japanese chain Uniqlo, after a patchy start in 2002, is now reporting
steady revenue growth. European chain Zara opened their first Shanghai
flagship store in Shanghai in 2004, while H&M now owns thirteen shops since
first opening their doors to Chinese customers in 2007. All of the above are
planning on opening further outlets in the near future. Foreign retailers like the
above, tend to produce locally. Their goods are generally perceived to be of
high quality and pricey in comparison.[21]

Socio-cultural factors

Continuing urbanisation and the liberalisation of the markets have led to the
emergence of an urban middle class of increasingly sophisticated consumers
demanding higher quality, variety and innovation from their retailers. The
number of households with an annual income of over US$5,000 has now

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reached 150 million. Growth has been uneven among different geographic
regions as well as rural and urban areas. Eastern coastal regions
demonstrate better overall economic performance with average household
incomes rising and above the national average. In addition, the past couple of
years have seen a significant rise in households’ disposable incomes.
Chinese consumers tend to have more of a taste for variety and many firms
have found it profitable to extend their ranges according to local tastes.[22] [23]

The expansion of the retail market has led to a shift in focus on the
customer experience and the retail environment: High-end shopping malls are
being built in first and second tier cities across the country as a response to
the fierce competition for good retail space which has driven to unrealistic
heights given the rate of new developments being created; this is particularly
true for cities like Shanghai and Beijing. The opening of the market has given
Chinese customers a profile and retailers are responding to it. As the broad
demand for established brands like Apple and Levi Strauss (which are sold in
China at higher prices than anywhere else) reflects, the acceptance of
Western goods is universal.[24]

Technological factors

China is one of the largest manufacturing countries in the world.

Successful foreign firms, in general, tend to have invested a lot of time and
resources into building a functioning distribution network and raising
awareness for their products.

While it is a lesser concern in cities like Shanghai and Beijing, distribution


to second and third tier cities remains largely inefficient and unpredictable.
Implementing control and efficiency in these factors requires a lot of resources
from any investor. As Primark is already producing some of its collections, it
benefits from an existing infrastructure and expertise. Other foreign retailers
like Zara who have mainly produced in Europe previously, do not have this

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advantage.[25]

Environmental factors

China’s environmental performance is notorious. As one world’s biggest


emitters of water pollutants and CO2, The Economist has ranked it among the
world’s worst performing countries in terms of its environmental health,
biodiversity, air and water pollution among other factors.[25]

China has a comprehensive set of ever increasing environmental


regulations for firms in place. The problem is enforcement, though. As
awareness of environmental issues is on the rise, government agencies are
increasingly wary of firms and their contribution to the problem. Based on
Japanese and European models, China is introducing the notion of
sustainability or the ‘Circular Economy’ which is based on a set of laws
requiring companies to “build or upgrade a production line to replace
hazardous raw materials with non-hazardous ones in its products and adopt
production processes and equipment with high resource utilization rates and
little pollutant generation. Where economically and technically feasible,
facilities must recover and use their own production wastes and waste heat or
transfer these wastes to other facilities or persons with the ability to use
them”.[26]

Legal factors

Since 2002, most regulations in retail sector have been lifted. It is now
possible to establish wholly owned enterprises rather than just joint ventures,
which has resulted in growing confidence among foreign retailers.

Local entities are now controlled by local Mofcom (Ministry of Commerce)


bureaus, rather than from one centralised ministry. Local officials tend to
extend favours to companies on their patch granting preferential access to
land or credit and easing bureaucratic constraints.[27]

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Why invest in Primark?

Primark’s growth

The value retail industry has seen a huge rise in the UK retail market over the
past 5 years with Primark at the helm of this rise. [28] Primark’s sales
performance has been exceptionally good with revenues rising from £1,933
billion in 2008 to £2,314 billion in 2009.[29] This is an excellent achievement
especially when the current recession’s adverse effect on other retail chains is
taken into account. Primark’s financial growth shows that its trading
philosophy of selling quality products at low prices is immune to economic
instability, appeals to spending conscious consumers and will serve as a great
advantage when expanding into the Chinese market.

Fig1: Number of Primark stores trading [30] Fig 2: Primark’s financial growth from 2005
-2009 [31]

Flexible investment options


We believe that there is a good investment opportunity for expanding into

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China. Assessing the risks, we consider China to be a friendly place for
European retailers, something that is also evident from the performance of
other European retailers in China. In addition, our plan to become the first
European retailer to launch Internet sales in China’s fast growing e-commerce
sector, makes Primark’s investments prospects even better.

For this expansion strategy, we require an initial investment of one billion


US Dollars. For this investment, we are searching for an investor from the
Middle East. We offer the opportunity for an investor to finance this project,
using flexible investment models that will meet the requirements of Islamic
Finance and Sharia Law if the investor so requires.

A corporate vehicle will be used, Primark China Ltd, where the investor
will become a preferential shareholder and not a creditor. This will follow the
basic Islamic Finance model, based on profit sharing and not the receivership
of interest rates.

Preferential shares in the company will carry a fixed dividend rate, over
and above the current market interest rate. The initial capital of one billion US
Dollars will be used for contracting out more manufacturers, setting up an
efficient distribution network and leasing and equipping the first stores. All
assets will be assets of the company, creating security for the investment.

As already mentioned above, our plan is a five-year plan, in which first


five years, money will be re-invested, within the company up-until all of our
strategic targets are met. Thus we expect a return on investment over and
above the interest rate after the initial five-year period. In order to reflect this
in the return for our investor, an option will be granted to him, to turn his
preferential shares into ordinary shares, after five years, in order for him to be
able to gain from actual dividends and capital gains profits. Alternatively, if the
investor wishes not to exercise the option, the preferential shares will carry a
maturity date within ten years, at which point the investor will be able to
reclaim his original investment or renegotiate the terms of his investment.

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In summary, we consider this to be a great investment opportunity for a
Middle Eastern investor due to the flexible terms offered. The investor will be
able to secure an initial payback over the market interest rate, while
eventually he will have the opportunity to gain from the overall operations and
growth of Primark in China.

Word count: 3,767

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References
[1] China: Small Budgets, Small Wardrobes. The McKinsey Quarterly, 2007, P70.

[2] Gelb, Mallary (Dec 2, 2005) Primark – King of no-frills fashion [Online] Available at
http://news.bbc.co.uk/1/hi/business/4466986.stm [Accessed on Nov 30, 2009]

[3] [4] [5] Business Wire (2009) Taobao sees significant new trends in Chinese online
consumption [Online] Available at http://www.allbusiness.com/company-activities-
managment/operations-supply/12703131-1.html [Accessed on Nov 20,2009]

[6] http://en.wikipedia.org/wiki/People's_Republic_of_China

[7] Ho, Filfreo. Importing, Exporting and Investing in China. Asian Supply Chain. March
2007.

[8] Datamonitor (2008) Apparel Retail in China [Online] Available at


www.datamonitor.com [Accessed on Nov 25, 2009]

[9] Available at http://www.zara.com

[10] Available at http://www.hm.com/cn/hm/hm/china__worldofhm_countrycode_cn.nhtml

[11]. Available at http://www.uniqlo.com

[12] [16] [20] [18] [22] [24] [25] PWC (2006) Investing in China’s Retail Industry. [Online]
Available from: http://www.pwc.de/fileserver/EmbeddedItem/PwC%20TL%20China
%20Retail%20Apr%202006.pdf?
docId=e502f94f9294a46&componentName=pubDownload_hd [Accessed on October 25,
2009]

[13] [14] [21] [23] The Economist (Oct 15, 2009) Impenetrable: Selling foreign goods
in China [Online] Available at: http://www.economist.com/displayStory.cfm?
story_id=14660438 [Accessed on October 25, 2009]

[17] The Economist (ed.) (2009) Pocket World in Figures – 2010 Edition. London, Profile
Books, 132-133

[18] The Economist (June 25, 2009) Shopaholics wanted: Consumer spending in China
[Online] Available at Http://www.economist.com/businessfinance/displaystory.cfm?
story_id=E1_TPJDDTNV [Accessed on December 1, 2009]

[19] McKinsey (2008) Preparing for China’s Growth [Online] Available at:
http://www.mckinsey.com/mgi/publications/china_urban_summary_of_findings.asp
[Accessed on December 10, 2009]

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[26] McElwee, Charles II (2008) Who’s cleaning up this mess? Rising environmental
awareness is affecting business in China. China Business Review [Online] Available
from: http://www.chinabusinessreview.com/public/0801/mcelwee.html [Accessed on
December 5, 2009]

[28] Associated British Foods Annual Report 2009, page 44

[29] Associated British Foods - Annual Report 2009, page 43

[30] Primark Stores Ltd. (2009) Primark’s History [Online]


http://www.primark.co.uk/page.aspx?pointerid=eb44df4565934edca627dac6ec12145a

[31] Associated British Foods Annual Reports from 2005 – 2009

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Appendix
1. Map of China

2. Progress of Retail Deregulation in China

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3 .Procedure of WOFE
Registration Procedures
Foreign companies are not allowed to directly submit the application documents to the
relevant authority. They must retain a PRC entity that is authorized or permitted by
relevant authorities to act as a sponsor. The sponsor will submit all the documents to the
examination and approval authority on behalf of the foreign enterprise. Procedures to set
up a Wholly Owned Foreign Enterprise in Shanghai are as following:
Step1: Company name checking and registration (about 5 working days)
Step2: Approval Certificate (about 15 working days)
Step3: Business License (about 7 working days)
Step4: Organization Code License (about 1 working day)
Step5: Tax registration(about 7 working days)
Step6: Open an RMB bank account (about 3 working days)
Step7: Register Foreign Currency Certificate (about 1 working day)
Step8: Capital verification (about 7 working days)

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