分类：Nikkei Asian Review

Edward Tse

Debunking Myths on Chinese SOEs

Original published by Nikkei Asian Review titled “Chinese SOEs are Focused on Business, Not Politics” on September 13, 2019. All rights reserved.

In the eyes of some politicians and media in the West, Chinese state-owned enterprises are little more than corporate vehicles for carrying out Beijing’s policy agenda. This perspective has led to calls to restrict SOEs’ investments and acquisition of other companies and technologies.

This is a shortsighted view. Although I am from Hong Kong, not mainland China, and am not a member of the Communist Party, I have served at different times as an independent board director at four Chinese SOEs since 2006: Shanghai Pharmaceuticals Holding, Baoshan Iron & Steel (Baosteel), the holding company of carmaker SAIC Motor, and currently, China Travel Service (Holdings) Hong Kong.

In inviting someone like me to join their board, these companies sought an external perspective to help ensure proper governance. At no point before or during any board meeting was I ever asked to vote a certain way. No one tried to interfere with my professional judgment on what would be good for the companies.

In all these years of board meetings, I cannot recall any discussion that centered on serving a certain political agenda. Rather, the discussions were inevitably about business. Just as with a large Western company, the talk was of revenue, profit, market share, cash flow and returns on investment and how to improve them.

Of course, government policy would at times be a matter for discussion. Beijing has for some years been pushing through a consolidation of the steel sector, for example, so that inevitably surfaced in deliberations when I was a director at Baosteel.

It is also important to note that Chinese SOEs are far from uniform in their governance or outlook. For companies involved in sectors that touch on national security, discussions about the government’s agenda would be much more natural than in consumer-focused sectors like travel and autos.

Other SOEs are tasked with providing public services, such as infrastructure, health care and education. Notably, their evaluation of projects is generally based more around addressing utility for the public than a simple internal rate of return.

In open sectors like retail, consumer goods or pharmaceuticals, however, Chinese SOEs have to survive in perhaps the world’s most intensely competitive market.

Many of these SOEs feel they are falling behind their private-sector peers in innovation and are under pressure to catch up or collaborate with them. They are particularly concerned with whether they can continue to effectively compete as China opens up more sectors to private-sector participation, especially by foreign companies.

Even in sectors like banking and insurance where SOEs traditionally held unshakable positions, they are no longer immune to competition from the private sector. Consider how Alibaba Group Holding affiliate Alipay and Tencent Holdings’ WeChat Pay now dominate online payments. With a focus on adapting technology, Ping An Insurance Group has overtaken state-owned peers like China Life Insurance to become the country’s largest insurer.

 

Chinese SOEs do enjoy some advantages because they are owned by the state, but this is most true in sectors involving national security or public infrastructure, like energy and telecommunications. In such cases, the SOEs’ ownership of key assets and their protected operating franchises are somewhat comparable to those of public monopolies like water companies or postal services in Western countries.

A number of them, such as telecommunications infrastructure company China Tower, also benefit from having other SOEs as their main clients.

Local governments in China also tend to favor purchasing from SOEs based in their region as a means of supporting them as significant area employers and taxpayers. This can come into play, for example, with orders for official vehicle fleets.

Further, state companies have long had a significant advantage in getting access to bank credit from the SOE-dominated banking system but this has been changing.

According to Moody’s Investors Service, SOEs accounted for 52.6% of outstanding bank corporate lending as of Dec. 31 even though they have been generating less than 40% of overall output.

But after President Xi Jinping declared private enterprise to be an essential part of China’s economic system late last year, the country’s financial regulators pledged to widen access to credit and financial support for the nonstate sector.

These changes are taking time to implement, but policy is headed in the right direction and technology is helping to take the place of ownership in assessments of the creditworthiness of individuals and small businesses.

Chinese SOEs also carry social burdens much more often than private companies. As an SOE, Baosteel had to invest considerable time and effort to address the labor and community impact when it shut down older factories in urban areas to move to cheaper locations.

Until now, China’s parallel structure of SOEs and privately owned companies has largely worked well. As a whole, this duality has been a source of resilience for China, not a drag.

Yet officials in Beijing have identified reform of state-owned enterprises as an imperative. Of late, this effort has focused on diversifying the shareholding of many SOEs. This has included the introduction of private capital in some cases.

To make mixed ownership reform a success will require the establishment of proper corporate governance structures and principles. The role of the state agency that oversees SOEs will have to shift over time from direct control to being one among a number of shareholders. These changes will help SOEs to be able to compete effectively in China’s fast-changing and increasingly innovation-driven environment.

About the author：Dr. Edward Tse
CEO of Gao Feng Advisory
Dr. Edward Tse is founder and CEO of Gao Feng Advisory Company, and a founding Governor of Hong Kong Institution for International Finance. One of the pioneers in China’s management consulting industry, he built and ran the Greater China operations of two leading international management consulting firms for a period of 20 years. He has consulted to hundreds of companies, investors, start-ups, and public-sector organizations (both headquartered in and outside of China) on all critical aspects of business in China and China for the world. He also consulted to the Chinese government on strategies, state-owned enterprise reform and Chinese companies going overseas, as well as to the World Bank and the Asian Development Bank. He is the author of several hundred articles and four books including both award-winning The China Strategy (2010) and China’s Disruptors (2015) (Chinese version of 《创业家精神》).

 

EDWARD TSE and BILL RUSSO
November 28, 2018 14:46 JST

Expanding mobility and digital services are offsetting the decline in vehicle sales

China is set to record its first annual decline in car sales in decades — at least, if the downward trend of the last four months continues. Sales in the world’s biggest car market fell 11.7% in October.

The gathering gloom about Chinese car sales, especially among foreign manufacturers, misses a fundamental point, however: growth in automotive services in the country is offsetting the decline in vehicle sales. We estimate that overall Chinese “automobility” revenues will rise this year to $590 billion, up $10 billion from last year. This figure is on track to top $1 trillion by 2025.

Chinese demand for mobility products and services has continued to rise as a growing population of urban residents earns higher wages and engages in economic activities requiring that they move around. An expanding range of options faces them: A city dweller can own or lease a car for her personal use, pay per use for a car to drive or ride in, or use public transportation. Demand for the purchase of new vehicles is also increasingly tempered by the growing availability of good-quality used cars.

The presence of commercially aggressive digital players like Baidu, Alibaba Group Holding and Tencent Holdings, together with their associated convenient mobile payment services, is helping to create a new competitive landscape in China.

Didi Chuxing, the country’s largest mobility services platform, handles some 30 million trips a day for over 550 million registered users. Bolstered by the huge popularity of short-distance ride hailing in China, Didi has become one of the world’s most valuable technology startups, with a valuation of more than $50 billion.

The new game of providing mobility services for people and goods represents an “automobility” business model based on the utility that vehicles can deliver, rather than on the sale to car owners.

The old model depended in part on the underutilization of vehicles sold to individuals and companies. Utility under the new model can be measured by kilometers traveled and the consumption of services linked to the connectivity features of new vehicles.

Shared-use vehicles, including those deployed for ride hailing, public transportation and carpooling, represented about 7% of China’s total passenger vehicle fleet last year. We forecast that their share will rise above 30% by 2025 as further service innovations emerge.

This means Chinese sales of new vehicles will continue to be under pressure. The automobility business model will increasingly commercialize connected, electric and autonomous vehicles through the economics of digital ecosystems. Companies such as Alibaba, Tencent, Baidu, Alphabet, Microsoft and Apple are viewing mobility-related services as a means of expanding their platforms.

Source: Baidu

How should foreign carmakers best capture the emerging opportunities in China and mitigate risks against the background of falling restrictions on their investment in local vehicle production and declining vehicle sales?

First, given the sheer size and speed of change of the Chinese market, the country needs to be placed at the core of carmakers’ global automobility strategies and not simply treated as a fringe market. This requires building an empowered corporate organization in China, developing market-specific capabilities while also leveraging the company’s global capabilities.

Traditional carmakers have generally been slow to embrace mobility services. They lack the digital DNA necessary for monetizing relationships with users of smart mobility services. Innovation linked to the digital economy and deepening relationships with end users will be key to survival in the increasingly technology-enabled new game in China.

Third, building a smart vehicle will not be enough. Emerging players, from Baidu and Alibaba to startup automakers like NIO, Byton and Weltmeister, are all focused on winning in the new game.

These companies aim to achieve intimacy with end users through digital platforms and monetize customer value through both mobility services and offerings for digitally connected lifestyles. NIO, for example, expects services to provide a bigger share of its revenue in the future than vehicle sales. It will be offering car battery-swapping services as well as creating a network of NIO Houses that will act as lifestyle hubs for users to connect, relax and play while getting vehicle support.

Traditional carmakers need to figure out a way to engage in this new model. Moving into software or services and becoming part of the digital ecosystem will be necessary, but will likely be difficult for companies who have long focused on the branded relationship with vehicle owners.

Lastly, companies need to create bespoke innovations in China for Chinese customers. The country’s vast market presents challenges and opportunities that are relatively new to foreign companies and they must adopt new ways to innovate to remain relevant.

The challenge already extends beyond China’s borders. Didi, for example, has recently expanded into Australia and Mexico. It has also invested in peers around the world including Grab, Lyft, Ola, 99, Taxify and Careem, creating an informal network that covers 80% of the world’s population.

Carmakers should pivot to where growth is heading. The traditional sources of competitive advantage for carmakers no longer guarantee success. Instead, they must build a new set of capabilities derived from digital ecosystems and mobility services partnerships.

For those who get it, the reward will be significant and will impact their global business. Those who do not will be marginalized and eliminated. Such is the nature of the new game in the world’s largest, most disruptive and most innovative market.

Edward Tse is chief executive of Gao Feng Advisory Co., a global strategy and management consulting firm with roots in China. Bill Russo is the firm’s managing director and former Chrysler vice president for Northeast Asia.

By Edward Tse and Bill Russo
September 18, 2018 16:21 JST

After passenger deaths, Chinese ride service has to show it is not ‘evil’

Didi Chuxing Technology, China’s dominant ride-hailing service, pledged this month to invest 140 million yuan ($20.39 million) to improve safety and customer service.

In May, Didi had also vowed to put through a range of safety enhancements. Those promises followed the rape and killing of a flight attendant in the central city of Zhengzhou, allegedly by the driver she had been matched with by Didi’s Hitch carpooling service.

Yet the company did not move quickly on those safety measures. On Aug. 24, a 16-year-old Hitch user was also allegedly raped and killed by her driver in the northeastern port city of Yantai.

The two deaths have sparked a crisis for Didi and exposed underlying issues with China’s new breed of fast-growing, entrepreneurial companies. Despite suspending Hitch and dismissing two senior executives, the ride service faces a public furor and boycott calls on social media. This could cloud its hopes to hold an initial public stock offering by the end of the year.

Until now, Didi’s primary focus has been on growth. By 2016, it had achieved a market share of more than 95% after merging with Tencent Holdings-backed Kuaidi Dache and taking over the China operations of Uber Technologies.

Didi’s consequent near-monopoly produced higher prices and gave it little incentive to keep up its previous pace of innovation. In a survey last year by web portal Sina, 82% of respondents said that hailing a ride had become more difficult over the previous year and 87% said it was costlier than ever before.

Didi nevertheless continued to grow. Recently, it expanded into Australia and Latin America. Besides Tencent and early backer Alibaba Group Holding, Didi has picked up investments along the way from Apple, Singapore state investment fund Temasek and Japan’s SoftBank Group , with the ride-services group’s valuation last year reaching $56 billion.

With the focus on growth, top Didi executives may have missed red flags they should have seen.

The value proposition of Hitch was problematic from inception. The company’s marketing campaigns implied Hitch could be used to find a romantic partner. A platform function enabled drivers to label passengers to one another using sexually suggestive terms, unbeknownst to the customers.

Didi’s current crisis has opened up the opportunity for competitors who can promise safer, more secure ride services. In general, Didi’s customers have been willing to pay a bit of a premium to upgrade from public transportation to the personal space of a private car service. Many of these users are likely to be willing to pay a little more for additional peace of mind.

Source: Google

The mobility service landscape in China is poised to evolve in a more sophisticated manner and open up further for new entrants. In a market of nearly 800 million urban residents, the vast majority of whom do not own a motor vehicle, demand for such services has grown exponentially and they have become an indispensable tool.

Traditional Chinese carmakers, whose main focus has been on manufacturing and product engineering capabilities, have started to realize that digital ecosystem players have significant competitive advantage in the mobility services. Consequently, they are becoming more experimental to retain relevancy.

Caocao Zhuanche, one of the services that has been growing in Didi’s shadow, was launched by Chinese automaker Zhejiang Geely Holding Group in 2015 as the country’s first all-electric vehicle ride hailing company.

Valued earlier this year at $1.6 billion, Caocao now operates in 17 cities and fills roughly 150,000 orders a day. As of January, it ranked seventh among Chinese ride services in market share, according to figures from data company Jiguang. Caocao’s primary vehicles are Geely-made EVs.

A distinguishing feature of Caocao is the service’s training certification system. All drivers go through a standardized course, adapted from one used in London for nearly a century.

In a parallel initiative, Geely’s new premium Lynk & Co. automotive brand offers personalized car-sharing services to a younger target market. Through experiments like Lynk & Co. and Caocao, Geely is blurring the line between manufacturer and service provider and transforming into an “automobility solutions” provider.

Shouqi Group, a long-standing state-owned car rental and limousine company in Beijing, has expanded into app-based services as well. Its iZuche.com platform focuses on providing fleets of high-end vehicles for major business meetings and events. The company also operates ride-hailing platform Shouqi Yueche, and electric-vehicle time-sharing platform GoFun Chuxing.

Shouqi’s ride service platform has won financial backing from internet company Baidu as well as an arm of EV maker Nio. Traditional carmaker Chery Automobile meanwhile has acquired 10% of GoFun to build up its mobility service capabilities. Chery has also launched its own taxi hailing service, called Veni.

Source: Google

As with Caocao, Shouqi has realized the need to provide more safety assurance for passengers. GoFun, for example, is rolling out an artificial intelligence-driven system for real-time monitoring of rides.

Other traditional carmakers are collaborating to find ways to survive the changing market climate and strengthen their competitiveness in the nascent automobility sector. In July, carmakers Dongfeng Motor Group, FAW Group and Chang’an Automobile launched T3 Mobile Travel Services as a new ride-sharing platform, indicating they will seek other partners to push into driverless cars.

Though the business models of some of these new challengers may catch on if they can correctly anticipate how consumer mobility needs will evolve, Didi still retains an advantage based on its 450 million registered users.

With the exposure its corporate culture of accepting outsized risks, it is time for investors and managers to think critically about Didi’s business model going forward, just as those in Uber have been forced to do. Like Uber, Didi’s investors include a number of venture capital funds whose purpose is to quickly generate high financial returns. The incredible speed of money has distorted the priorities of Didi’s management.

Didi’s latest safety plan appears meaningful, however. A new system in trial makes audio recordings of each ride to provide a record in case of harassment allegations or disputes. An enhanced app feature connects riders immediately to police. The company has also enhanced its driver training and critical response programs.

It remains to be seen how much difference these measures will make. The real problem lies in the corporate culture and social responsibility of Didi. Didi has to demonstrate corporate leadership well beyond the narrowly defined realm of financials.

In a recent letter to Didi staff, Chief Executive Cheng Wei said, “Didi is not an evil company and we don’t put profit ahead of everything.” Let’s see if the company lives up to that.

About the authors
Dr. Edward Tse
Founder and CEO, Gao Feng Advisory Company
Dr. Edward Tse is founder and CEO of Gao Feng Advisory Company. A pioneer in China’s management consulting industry, Dr. Tse built and ran the Greater China operations of two leading international management consulting firms for a period of 20 years. He has consulted to hundreds of companies – both headquartered in and outside of China – on all critical aspects of business in China and China for the world. He also consulted to the Chinese government on strategies, state-owned enterprise reform and Chinese companies going overseas. He is the author of over 200 articles and four books including both award-winning The China Strategy (2010) and China’s Disruptors (2015) (Chinese version «创业家精神»).
Email: edward.tse@gaofengadv.com

Bill Russo
Managing Director and the Automotive Practice leader
Gao Feng Advisory Company
Bill Russo is Managing Director and the Automotive Practice leader at Gao Feng Advisory Company based in Shanghai. With 15 years as an Automotive executive, including over 14 years of experience in China and Asia, Mr. Russo has worked with numerous multi-national and local Chinese firms in the formulation and implementation of their global market and product strategies. He was previously Vice President of Chrysler North East Asia, where he managed the business operations for the Greater China and South Korea markets. Prior to this, Mr. Russo was Head of Product & Business Strategy for Chrysler. He also has nearly 12 years of experience in the electronics and IT industry, having worked at IBM Corporation as a manufacturing and systems engineer, and formerly served as Vice President of Corporate Development at Harman International.
Email: bill.russo@gaofengadv.com

May 11, 2018 16:35 JST
Bill Russo and Edward Tse

International automakers have earned hefty profits from China’s emergence over the past two and half decades as the world’s largest car market, yet have felt unsatisfied because of a regulatory requirement to share these earnings with a local partner.

The announcement last month that the rules requiring foreign carmakers to operate in 50/50 joint ventures with local automakers will be rescinded after years of lobbying might suggest that foreign companies will soon be able to boost profits by raising their ownership in their local operations to 100%. (Their share of profits was usually already more than half when trademark licensing and other fees were included.)

Yet the road ahead is not nearly so clear and straight. A crop of private Chinese automakers operating on their own are leading a surge that has seen local brands’ share of the domestic market start to approach 50%. Meanwhile, China’s powerful internet companies are focusing on mobility services as a critical growth driver for their digital ecosystems, putting themselves at the forefront of the industry’s impending technology shifts in what will be the biggest market for such offerings.

The outlook however need not be gloomy for foreign carmakers. They should seize Beijing’s market opening as a turning point to rethink their China strategy. This can be a chance to form new partnerships to build innovative vehicles in China for sale around the world, taking advantage of emerging suppliers who can produce component technologies at scale.

Mercedes-Benz showed off several new luxury models for the first time at the Auto China 2018 show in Beijing in April. © Reuters

The 50/50 joint venture rule dates back to 1994. At that time, Chinese auto manufacturing was dominated by state-owned enterprises which lacked the technical and financial means to develop their business further independently. The government hoped local carmakers would learn from experienced foreign partners and eventually emerge as successful global automakers in their own right.

This has not worked out quite as expected. While Sino-foreign automotive joint ventures have supported the development of networks of suppliers capable of high-quality production, no global car brands have emerged from China as a result of the 50/50 policy and foreign brands have dominated local passenger vehicle sales.

Nonetheless, on April 17, the National Development and Reform Commission announced that foreign ownership limits on ventures producing special-purpose vehicles and new energy vehicles will be eliminated by the end of this year. The foreign ownership cap is to be abandoned for commercial vehicles in 2020 and for conventional passenger vehicles in 2022. Foreign automakers will also no longer be limited to having only two Chinese joint ventures.

While the regulatory requirement for joint ventures will be scrapped, JVs are unlikely to disappear. Some, and perhaps most, existing joint ventures will probably remain as the foreign carmakers could find it difficult to reach agreement with their partners on restructuring ownership.

With the policy relaxation starting with new energy vehicles, wholly owned foreign carmaking ventures are likely to appear first in this area. U.S. electric car producer Tesla has expressed keenness to take this path.

Yet even with new ventures, foreign carmakers would be well advised to consider the merits of taking on Chinese partners, if not necessarily the same ones.

The leading domestic carmakers today are privately owned companies which have largely grown without the benefit of foreign joint-venture partners, such as Zhejiang Geely Holding Group, Great Wall Motor and BYD. The capabilities of local players are rapidly improving and Chinese brands now hold a 44% market share in the country. They are the pacesetters in the fastest-growing market segments — sport-utility vehicles and electric vehicles.

However, the real disruption of China’s car market is not coming from its traditional manufacturers. The prevalence of the mobile internet has made it possible for individuals to achieve personal mobility without vehicle ownership. Competing in the new business model requires more than the engineering of cars themselves, but also access to a digital ecosystem of mobility services. This new service-centric business model fundamentally transforms the car into a transportation and digital services platform and alters the economics for commercializing connected, electric and autonomous vehicle innovations.

Baidu, like rival Chinese internet companies, is investing in self-driving technologies, seeing the vehicles as a platform to offer a range of lifestyle services. © Reuters

Chinese mobility startups are quickly emerging and expanding, backed by deep-pocketed internet services companies including Tencent Holdings, Alibaba Group Holdings, and Baidu. All three companies are working on self-driving technologies. Both Tencent and Alibaba are also major shareholders of ride-share leader Didi Chuxing. Tencent has also invested in new electric carmaker Nio while Alibaba has invested in rival Xpeng Motors.

The internet companies are seeking to transform automotive hardware into an intelligent platform for a wide variety of online and offline lifestyle services. It is likely that the future mobility revolution will be largely led by Chinese digital companies and their ecosystem partners, especially in areas such as ride hailing and car sharing. Foreign automakers can gain an edge by seeking allies among these Chinese companies rather than taking advantage of their new freedom to operate independently.

Indeed, new forms of Sino-foreign collaboration are likely to surface as companies recognize the need for joint ventures that bring together complementary capabilities. At the same time, the removal of the compulsory joint venture structure will likely eliminate the last inhibitor that has discouraged foreign carmakers from making more use of China as an export platform.

The rapid evolution of China’s automobility industry now requires every participant, Chinese or foreign, to bring relevant capabilities to the world’s largest mobility marketplace. In this emerging arena, all players will have to apply a collaborative innovation model that matches local needs with global capabilities.

Beijing’s decision to scrap its automotive foreign ownership limits is a recognition that China’s industry has become a pacesetter for commercializing new mobility technology thanks to its advanced digital economy. The new policy will alter the industry’s competitive dynamics and accelerate commercialization of new mobility innovations at scale. It is up to foreign carmakers to find their own forward.

Bill Russo is managing director of Gao Feng Advisory Co., a global strategy and management consulting firm with roots in China, and a former Chrysler vice president for Northeast Asia. Edward Tse is Gao Feng’s chief executive.

 

By Edward Tse| February 9, 2018

Companies like Didi and Meituan are increasingly coming into competition

Some observers have criticized China’s market economy for lacking the “creative destruction” that is said to give Western capitalism its lasting vitality.

Such doubts are misplaced as the new year is likely to underscore. In recent weeks, Didi Chuxing, the country’s predominant ride services app, has moved to add bike-sharing options to its platform and has acquired Bluegogo, a bike operator that had run into difficulties. The move clearly positions Didi, already one of the world’s most valuable startups, to take on current bike-sharing leader Mobike. Meanwhile, Meituan-Dianping, which is best known for its food delivery service and has more than 250 million users, has moved to offer car-hailing services in competition with Didi.

The fight is on. Didi Senior Vice President Chen Ting has already said Meituan’s move will touch off the “war of the century.” In the background is the increasing overlap between the business networks of China’s two most valuable listed companies, Tencent Holdings and Alibaba Group Holding. After a series of mergers, both have ended up as key shareholders of Didi. Tencent also backs Meituan and Mobike while Alibaba is a major investor in Ofo, which is Mobike’s top rival as well as a partner of Didi’s.

Not long ago, many argued that state-owned enterprises were becoming increasingly dominant in China’s economy at the expense of the private sector. These observers highlighted government protections enjoyed by state companies and noted their privileged access to resources and market niches.

In reality, the fastest-growing companies in China over the last few decades have predominantly, if not entirely, been entrepreneurial companies from the private sector. According to a study by the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences, new economy sectors, ranging from e-commerce to car-hailing services, expanded twice as quickly as China’s overall GDP over the 10 years to 2016. These new economy companies are nearly always private sector companies.

The most valuable Chinese companies today are typically “mega ecosystem” players which operate networks of businesses that can support each other and supplement each other’s capabilities. A milestone was crossed last year when Alibaba and Tencent, the mega ecosystem leaders, surpassed Facebook in market capitalization.

The growth of entrepreneurial Chinese companies has been amazing. According to tech-sector funding research company CB Insights, the number of unlisted Chinese companies valued at $1 billion or more — the so-called “unicorns” — has risen to 59. The U.S., with nearly twice as many unicorns, is the only country where CB Insights counts more.

The Chinese though are closing the gap fast. Five years ago, CB counted only three Chinese unicorns, less than a quarter as many as it tallied then in the U.S. Those in China now valued at $30 billion or more include Didi, Meituan, Ant Financial Services Group and smartphone maker Xiaomi.

The notion of a business ecosystem is not new. Apple, the world’s most valuable company, was a pioneer in this regard when it launched the iPhone back in 2007 and made the App Store its platform for distributing apps. Other leading U.S. tech companies such as Amazon.com and Alphabet are also ecosystem players. Chinese companies, however, have turned out to be even more adept at building such organizations.

Alibaba, Tencent and Xiaomi are prime examples of mega ecosystems. Building out from their original core businesses, they have jumped into a string of new sectors as market opportunities have popped up amid economic reform and technological developments have enabled them to disrupt existing means of doing business.

Alibaba started as a small business-to-business online marketplace almost 20 years ago. Around 2003, when online shopping was emerging, Alibaba jumped in with consumer-to-consumer site Taobao and later business-to-consumer site Tmall. Next Alibaba started Alipay to support mobile online payments and then later used its platform to offer wealth management services, including the Yu’e Bao money market fund, which subsequently became the backbone of its network’s internet finance business.

Today, Alibaba’s internet finance interests are grouped under Ant Financial, which includes businesses such as electronic payment processing, banking, social credit scoring and financial cloud services. (Alibaba said on Feb. 1 that it will resume its direct shareholding in Ant, exercising rights to take a one-third stake.) Alibaba has also branched into areas including big data, smart logistics, media, auto-mobility and cloud storage. Each sector has its own system which together form Alibaba’s mega ecosystem. Though its development took a somewhat different course, Tencent has built a mega ecosystem too.

Chinese companies seem more inclined than their Western counterparts to migrate across sector boundaries and create larger ecosystems. This is perhaps because new market opportunities have been popping up more frequently in China and its consumers have embraced smartphone apps more closely. When they sense an opening, Chinese companies can quickly form ecosystems of collaborative partnerships.

In contrast, most foreign multinational corporations tend to focus on what they have been doing all along and avoid jumping across sector boundaries. This is a result of the “core competence” doctrine that has governed corporate strategy thinking in the West for about 30 years. Whle Chinese companies are more inclined to expand “horizontally” into new sectors, Western companies tend to grow “vertically” to areas upstream or downstream from their original focus.

Besides Alibaba and Tencent, companies like Ping An Insurance Group, Baidu and JD.com are building out mega ecosystems with incredible speed and intensity. Even some traditional manufacturers are moving in this direction. Zhejiang Geely Holding Group has gone from producing entry-level cars to selling premium models with the help of foreign acquisitions and has been the first Chinese carmaker to move into on-demand mobility services. It has also been experimenting with connected intelligent vehicles, shared ownership programs and flying cars, together assembling a sprawling transportation services ecosystem.

Clearly access to abundant user data is key for these kinds of companies. Even bike-sharing services like Mobike and Ofo claim that they are data-centric companies, signaling that they will also build out their ecosystems with consumer lifestyle at the core.
New technologies such as the internet of things and 5G mobile networks will enable companies to crisscross sectors faster and more capably. The operations of China’s mega ecosystems will overlap increasingly with each other, driving even more intense competition.

Perhaps more collaborations in some cases or even the merging of mega-ecosystems will take place. The “coopetition” that results would be even more dynamic. The already powerful mega ecosystem players could then get even more powerful. This will be exciting to watch.

Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting firm with roots in China, and the author of “China’s Disruptors.”

 

EDWARD TSE and ALAN CHAN
September 28, 2017 7:14 pm JST

Lower-profile entrepreneurs are achieving exponential growth after humble starts

A growing number of privately owned Chinese companies have been achieving exponential growth and successfully transforming their businesses. Many of them however remain relatively unknown in the West. Unlike famous Chinese internet companies like Alibaba Group Holding and Tencent Holdings and the latest crop of startups with skyrocketing valuations, these less prominent companies are comparatively down-to-earth and generally had humble beginnings but now boast solid business models.

SF Express, Oppo, Vivo and Midea Group are prime examples of this group. Each boasts a unique entrepreneurial story and has been relentlessly pursuing innovative strategies to create new markets and redefine the rules of the game for their sectors. Understanding these companies’ growth and origins can shed light on the complex, multi-dimensional and dynamic context of business in China.

SF Express, dubbed the “FedEx of China,” is a delivery-services company based in Shenzhen. At the age of seven, founder Wang Wei migrated from Shanghai to Hong Kong. After he graduated high school, he began working at a small print shop back across the border in Guangdong Province.

While sending print samples to clients in Hong Kong, he quickly noticed the growing demand for cross-border delivery. At the age of 22, he convinced his father to give him a 100,000 yuan ($15,000) loan and founded SF Express with just six employees and one delivery van.

Wang’s business has grown exponentially since its 1993 founding, riding the development of trade around the Shenzhen Special Economic Zone and other areas of the Pearl River Delta. During the Severe Acute Respiratory Syndrome outbreak in 2003, Wang seized the opportunity to buy five planes from cargo airline Yangtze River Express amid the slowdown in the aviation industry and then secured a license to run charter flights to keep deliveries flowing. The subsequent boom in e-commerce saw demand for timely package delivery services rise yet faster.

Today SF Express is a leading market player, with more than 13,000 service points, 400,000 employees, and a fleet of 15,000 motor vehicles and 36 cargo aircraft. Its revenue climbed 21% last year to 57 billion yuan, while net profit soared 112% to 4.18 billion yuan.

This year has been even more dynamic for SF Express. In February, it completed a backdoor listing on the Shenzhen Stock Exchange via an asset swap with defunct cable manufacturer Maanshan Dintai Rare Earth & New Materials and soon after could claim the highest market capitalization of any company on the tech-heavy exchange.

In May, SF Express announced a joint venture with global package delivery company UPS for services from China to the U.S. In June, SF Express completed its first commercial deliveries using drones after receiving a Chinese airspace license. Then on Aug. 22, it raised 8 billion yuan through a share placement to fund growth initiatives.

Smartphone disruptors
Leading smartphone brands Oppo and Vivo are both based in Guangdong and owned by the same parent company, BBK Electronics, a consumer electronics manufacturer founded in 1995 by entrepreneur Duan Yongping. Over the years, BBK Electronics has produced a wide range of products, from corded phones to household appliances and hand-held language learning devices.

Source: Baidu.com

Oppo was originally founded in 2004 by Duan and Tony Chen, who remains chief executive. Before entering the smartphone business in 2008, Oppo sold DVD and Blu-ray Disc players. Vivo was founded in 2009 by Duan and Shen Wei, who also still serves as chief executive. It entered the smartphone market in 2011 with handsets featuring slim design and high-quality sound.

Today both Oppo and Vivo target young professionals and students in secondary Chinese cities. Both brands feature high-end specifications with modern industrial designs that are comparable to Apple’s latest iPhone models. They are positioned with compelling selling points such as fast charging, large memory capacity and long battery life and boast various custom features for selfie and music enthusiasts.

Both brands rely heavily on traditional retail and distribution channels in secondary cities, leveraging the vast sales network of parent BBK Electronics. For example, Oppo has a presence in more than 200,000 retail outlets across China, with flagship stores in the biggest cities to showcase its models’ high-end image. It also gives attractive incentives to retail partners to push its brand.

In addition, they have invested heavily in traditional marketing, such as product placements, outdoor advertising, celebrity endorsements and television show sponsorships. Oppo is an official global partner for “America’s Next Top Model” and Vivo is an official sponsor of the 2018 and 2022 soccer World Cup tournaments. These marketing efforts are so successful that over half of consumers surveyed in secondary Chinese cities mistook the two brands for foreign companies.

In 2016, Oppo shipped 78.4 million smartphones, surpassing Huawei Technologies, Samsung Electronics and Apple to lead all brands in global totals. Vivo came in third, with 69.2 million smartphones shipped and a market share of 14.8%.

Smarter homes
Many industries in China are undergoing disruptive digital transformation, consumer appliances included.

Midea, founded in 1968 in Guangdong, has in recent years created an ecosystem of digital capabilities to capture new opportunities. Last year, Midea generated more than 10 billion yuan in sales on Tmall, Alibaba’s market-leading business-to-consumer online platform. This past January, Midea announced a strategic partnership with Tmall rival JD.com, aiming to deepen cooperation in the fields of intelligent home appliances, smart homes, channel expansion, personalized products and big data analytics, as well as a strategic partnership with Tencent’s QQ social network to collaborate on the internet of things, cloud technologies and smart home appliances.

Source: Baidu.com

Midea is also making big bets on industrial transformation. In 2016, it completed the 4.4 billion euro ($5.3 billion) acquisition of a 94.55% stake in Kuka, a leading German robotics manufacturer. It is aiming to leverage Kuka’s leading technological capabilities in automation, robotics and logistics solutions. This past February, Midea also acquired 50% of Servotronix, an Israeli automation solutions company, for $170 million.

Midea is now aggressively pushing forward a new “smart home + smart manufacturing” strategy, with the goal of becoming a “world leading technology group, focusing on consumer electronics, air conditioners, robotics and automation.” Midea has already invested 5 billion yuan in building smart factories with advanced automation and data exchange in a number of Chinese cities, utilizing a total of 1,500 robots. It ranked 175th on a European Commission list of the world’s top investors in research and development and was the only Chinese home appliance producer to make the list of 2,500 companies.

The growth mentality and entrepreneurial spirit of companies like Midea, SF Express and BBK should be an inspiration to both local and foreign business leaders. The visionary entrepreneurs who founded companies like these excel in speed, agility and adaptability and are grabbing new opportunities amid market discontinuities and spotting unaddressed needs. They are relentlessly identifying new strategic growth areas through fearless experimentation, jumping over capability gaps and charging across traditional industry boundaries, carving a path distinct from core competence-focused players and from diversified conglomerates such as Dalian Wanda Group.

China is no longer just a fringe or emerging market for multinational companies but increasingly at the core of their global strategies. The proliferation of technology enablers and intense competition will drive further development of business models and technological innovation. With China’s gradual transition from a planned economy to a market-based one, new opportunities will continue to emerge and be identified.

China is increasingly becoming a source of inspiration for new intellectual capital in strategy and management science. This unprecedented phenomenon, as shown by the growth stories of SF Express, Oppo, Vivo, Midea and many other similar organizations, will require the wider business community to look at organizations in new ways.

Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting firm with roots in China.
Alan Chan is a senior consultant of the firm.

 

By Dr. Edward Tse and Jason Zhang
May 4, 2017

Aging societies are driving growth in innovation and new business models

China’s health care industry is infected. Not with some lingering malaise, but with a passion for high technology that promises a cure for the problems of a rapidly graying population.

The widespread application of advanced technology, such as artificial intelligence, big data and the internet of things (IoT), is transforming how the country views health care.

With the largest online population in the world, a vibrant startup and venture capital ecosystem, and growing demand for healthy lifestyles, China has seen explosive growth in both technology and innovative business models. The numerous problems with health care — lack of qualified doctors, disparity in distribution, and inefficient hospital operations, to name a few — are actually seen as sources of opportunity by a new generation of players.

But given the dynamism of China’s market and abundance of disruptive technology, incremental strategy is no longer sufficient for companies to succeed in this environment. Traditional competitors are being tested, and new types of players are constantly emerging.

The winners will be companies that develop game-changing strategies by challenging business-as-usual assumptions. These companies leverage technologies to develop radically new solutions that address major problems. In this way, they create paradigm shifts by exploring new markets and finding new ways to compete.

GAME CHANGERS

A number of Chinese startups have established themselves in the connected health arena, which fuses IoT technologies with the traditional health care sector. For example, WeDoctor, an online portal, focuses on hospital appointment services. Ali Health, a subsidiary of Alibaba Group Holding, is now a leading pharmaceutical e-commerce platform. And Chunyu Doctor provides a telemedicine platform for remote doctor consultation.

These companies have adopted an incremental strategy to alleviate problems in the health care industry.

The game-changers, however, are those like Shenzhen-based iCarbonX. The company has teamed up with seven other technology companies around the world to gather different types of health data; everything from metabolites and bacteria to sleep hours, fatigue and pain levels. It then uses AI to sift through the data. Based on the analysis, a digital avatar will tell the user what to eat, when to sleep and what activities they should be doing. Established in 2015, the company has raised $600 million in funding, as investors zero in on precision medicine, precision nutrition and other extended preventive measures.

Zhejiang POCTech Medical Corp. is also an interesting company to watch. It has developed a wearable device that enables continuous glucose monitoring. Using biosensors that gather information through 3,000 sensor data points updated every three minutes, the device allows doctors to diagnose and treat diabetes patients more accurately. China is the world’s largest market for diabetes-related medical products.

Source: Zhejiang POCTech Medical Corp. website

TAKING ON THE WORLD

After decades of its one-child policy, during which life expectancy rose and fertility rates fell, the country will soon find itself with more seniors than it can adequately care for. But China’s rapid embrace of a technological revolution in health care offers a rich breeding ground for a range of technology innovations that could have global significance.

Being aware of the many opportunities ahead, Chinese entrepreneurs will remain overwhelmingly positive. As Wang Jun, the founder and CEO of iCarbonX, said: “We represent a new model of an international Chinese organization. China has a legitimate shot to be a lead player on the international stage. Our technology can change the world.”

Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting firm, and the author of “China’s Disruptors.”
Jason Zhang is a Senior Associate of the firm.

 

September 22, 2016 12:00 pm JST
Dr. Edward Tse, Ian Meller and Jackie Wang

Mobile payments have been embraced in China at a rate unseen anywhere else in the world, reaching approximately 16.3 trillion yuan ($2.5 trillion) in 2015. Whether it’s buying plane tickets or electronics or even paying utility bills, the Chinese consumer instinctively reaches for his or her smartphone. This is largely due to a consumer class that has leapfrogged the era of the personal computer and jumped directly into the smartphone age. China’s mobile payments industry has entered a new and exciting phase.

There have always been alternatives to the dominant Alipay and WeChat Pay sevices, but in the past year credible challengers have started to emerge. February saw the launch of Apple Pay, in partnership with state-owned payment processor China UnionPay. Samsung Pay arrived a month later. Viable alternatives backed by companies including Huawei Technologies, Xiaomi and LeEco are the latest to arrive.

Alipay, owned by Ant Financial Services Group, an affiliate of Alibaba Group Holding, remains the largest mobile payments player in China. It had a market share of 68% at the end of 2015 and has more than 400 million registered users, thanks to its links with Alibaba’s Taobao and Tmall shopping sites. WeChat Pay also has backing from parent Tencent Holdings that helps its reach. It is linked into WeChat, China’s largest instant messaging and social media platform.

Last year, WeChat Pay’s market share was 20%, making it a distant second to Alipay. But WeChat’s growing number of users and the increasing popularity of social media are helping it gain market share. This past Chinese New Year’s eve, some 8 billion “red packets,” gifts of cash traditionally exchanged at the holiday, were given through WeChat Pay.

The competition between Alipay and WeChat Pay has reached new heights as both are transforming into global e-wallets not only for Chinese domestically but also overseas. Both services have been building partnerships with foreign retailers and e-commerce platforms allowing customers to purchase products in yuan while abroad and on foreign websites. Travelers can also get tax refunds abroad through Alipay, which can save time at the airport.

NEW PLAYERS The emergence of Apple Pay in the China mobile payments market is significant, marking the arrival of the first legitimate foreign competitor to Alipay and WeChat Pay. For once, the two incumbents face a competitor whose ecosystem can rival their own.

Apple is one of the top smartphone companies in China, where it has been aggressively expanding. Yet before Apple Pay had even launched in China, analysts had discounted its ability to match the range of functions offered by Alipay and WeChat Pay and noted the lack in China of near-field communications, or NFC, terminals for contactless payment. When Apple revealed a partnership with UnionPay rather than Alipay, analysts again called it a mistake.

Within two days of Apple Pay’s launch in China, more than 30 million bank cards were connected to the service, implying linkage with one-third of the phones in the country then equipped to support NFC payment. By partnering with UnionPay, Apple gained access to China’s largest banks and thus a majority of China’s consumer class.

Before Apple Pay’s launch in China, Apple had already ensured that popular Chinese apps, such as those of food delivery service Meituan, e-commerce site JD.com and online travel agent Qunar, would support its payment service. Crucially, Apple Pay could soon be used on Tmall due to a new Chinese law requiring that e-commerce websites allow payments via competing systems, eliminating one of Alipay’s major competitive advantages.

PHONE MAKERS Apple isn’t the only one diving into China’s mobile payments market. Samsung Electronics, Huawei, Xiaomi and LeEco, the parent of Leshi Internet Information & Technology, are all making their own plays. Samsung followed Apple by partnering with UnionPay and getting the backing of China’s major banks for Samsung Pay, but Samsung has also integrated Alipay into its e-wallet.

When Huawei, now the largest smartphone company in China, originally announced its mobile payment service in March, it had the backing only of Bank of China(BOC). But by the time it launched in August, Huawei had added another 24 banks. In addition, its latest flagship smartphone, the Huawei P9, allows users to directly activate HuaweiPay through a fingerprint scanner on the back of the phone, even when the keypad is locked.

Other Chinese companies are in various states of building their own mobile payment systems. Xiaomi, one of China’s highest valued startups and the creator of the popular Mi series of smartphones, launched Mi Pay in early September. LeEco, which recently started offering mobile phones, has been building up its payment infrastructure by hiring a think-tank in Beijing to study internet finance and mobile payments.

For dedicated hardware providers like Xiaomi, Samsung, Apple and Huawei, mobile payments are another node of their ecosystems. The payment systems are features designed to increase the loyalty of consumers and help keep them hooked on the companies’ hardware.

Internet companies like Tencent and Alibaba are playing a much longer game, with mobile payments just a starting point for their bigger ambitions in internet finance.

Ant Financial has built an intricate and elaborate ecosystem that offers a variety of financial services and products to Chinese consumers including Sesame Credit, a credit scoring system based on Alipay payment histories, and policies from Zhong An Insurance. Alipay also offers loans to consumers based on online purchasing records on Tmall and Taobao. WeChat Pay users can also buy investment products.

The early success of Apple Pay in China and its ability to change the mobile payment behavior of the Chinese consumer is the largest threat that Tencent and Alibaba have yet faced on the mobile shopping front.

We are witnessing companies with different ecosystems clashing over the Chinese consumer’s wallet. This is an exciting and innovative period in China’s mobile payments sector. While Alibaba is the dominant player now, new entrants, both local and foreign, which are bringing their own service portfolios and a culture of innovation and disruption, are more than capable of challenging the status quo. It remains to be seen if these new players can ultimately unseat incumbents whose ambitions go far beyond simple mobile payments.

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting company, and the author of “China’s Disruptors” (Portfolio, 2015).

Ian Meller and Jackie Wang are consultants at Gao Feng.

 

September 8, 2016 12:30 pm JST
By Dr. Edward Tse and Ian Meller

With the Chinese government keen to encourage innovation in the financial industry, the fintech revolution is quickly gaining pace.

Financial technologies companies backed by Chinese venture capital raised $2.4 billion in the first quarter of 2016, according to accounting firm KPMG. This represented a 49% share of global fintech investment in the period, bigger than that of North America and Europe combined.

Ant Financial Services Group, Alibaba Group Holding’s fintech affiliate, itself raised $4.5 billion in April, making it the largest round of funding for a fintech company in the world. Four out of the five largest fintech companies in the world by valuation are now in China, according to Jason Jones, chief executive of lending industry events group LendIt: Ant Financial; Shanghai Lujiazui International Financial Asset Exchange, or Lufax, which operates as Lu.com; Zhong An Online Property and Casualty Insurance and JD.com’s JD Finance. And this market is only set to grow.

The majority of China’s leading fintech players are also its internet giants. Their digital platforms have amassed user bases that have then gone on to serve as the launch point for fintech endeavors. Alibaba and Tencent Holdings dominate the online payment market in China, scaling up faster with convenient financial services that traditional lenders can’t match.

Compared with fintech, China’s financial system is relatively immature. According to the Mintai Institute of Finance, nearly 80% of small- and medium-sized enterprises in China are not adequately served by banks. The People’s Bank of China has found that about three-quarters of the general population is “underbanked” and lack access to financial services.

It is these gaps that allow innovative outsiders to enter the market. This is apparent in the area of credit scoring where the lack of an established model has created the opportunity for internet players to step in.

Ant Financial developed Sesame Rating, China’s first credit scoring system. It uses big data to analyze the purchasing behavior of users on Alibaba’s e-commerce platforms to judge their creditworthiness based on a number of factors.

Chinese entrepreneurs’ willingness to experiment means products and services hit the market quickly and evolve quickly. Initially, AliPay, Ant Financial’s payment service, was used only as a payment method for Alibaba’s e-commerce platform. Now, AliPay can be used at brick-and-mortar stores, for utility bills and even for overseas shopping.

China has become fertile ground for fintech solutions. Online wealth management has gained traction among young middle-class consumers. As more risk-tolerant investors, they tend to favor equities and mutual funds over traditional savings accounts. At $66.9 billion in 2015, China’s peer-to-peer lending market is now the world’s largest and more than four times the size of its U.S. counterpart.

However, the P2P market has been plagued by inadequate regulation and hence, a high frequency of frauds and scams such as the $7.6 billion Ezubao Ponzi scheme uncovered last year. Regulators have since started to get a grip on the sector. After an initial series of regulations were issued at year-end, some 1,600 P2P companies shut down during the first half of 2016. Another series of rules issued in August further restricted the scope of activities permissible to P2P companies, barring them from creating asset pools or providing loan guarantees.

Chinese fintech players are also moving into the nascent blockchain industry. Ping An Insurance Group, one of China’s largest insurers and the owner of Lufax, in May became the first Chinese entity in a global blockchain consortium with Goldman Sachs and Barclays.

Some Chinese companies are leading the pack. Wanxiang Blockchain Labs, a think-tank that is to host the Global Blockchain Summit in Shanghai in late September, is behind ChinaLedger, an alliance of 11 regional commodity, equity and financial asset exchanges that plan to establish an open-source blockchain protocol.

Existing networks help

China’s internet giants have some of the most sophisticated fintech ecosystems. Apart from Alipay and Sesame Credit, Ant Financial also owns Yu’E Bao, China’s largest money market fund. Yu’E Bao raised $90 billion in its first 10 months and accounts for approximately one-fifth of China’s 4.2 trillion yuan ($630 billion) money market fund sector. Ant Financial’s portfolio also includes digital banking, microloans, securities, crowdfunding and other wealth management products.

Tencent founded WeBank, China’s first online only bank, in 2014. WeBank offers consumer, corporate and international banking services. By May 2015, it had launched a personal credit line service to select users without guarantee or collateral through Tencent’s QQ and WeChat messaging platforms. Unlike Ant Financial, WeBank acts as a platform connecting borrowers and lenders directly rather than from its own balance sheet, allowing it to avoid credit risk.

Lufax, launched in September 2011, is China’s first online investment and financing platform. It became the world’s most valuable fintech startup in January after raising $1.2 billion on a valuation of $18.5 billion before getting eclipsed by Ant Financial. Mostly known for its P2P lending service, Lufax’s larger ambitions are embodied in its “9158 strategy” to offer products across various sectors of the finance industry via its platform. By the end of 2015, it had signed up 500 institutions across more than 300 cities.

Zhong An, China’s first digital insurance platform, was jointly launched in November 2013 by Alibaba, Tencent and Ping An. The idea behind Zhong An was to digitize the user experience and insurance value chain. By using the unique capabilities and user bases of its stakeholders, Zhong An was able to launch innovative insurance products that targeted China’s digital economy as well as more traditional liability and property insurance products. In its first year, Zhong An underwrote 630 million insurance policies for 150 million clients.

Chinese fintech companies are now starting to expand overseas. In September 2015, Ant Financial acquired a majority stake in Paytm, India’s biggest online payment company, to gain access to a massive population just beginning to embrace mobile payments. Tencent’s Wechat Pay has now turned into a global wallet for Chinese consumers after it launched clearance services for nine different foreign currencies and built partnerships in 20 countries. Tencent itself has entered the South African market through an alliance with Standard Bank to launch a mobile payment system targeting the emerging middle class.

While the Chinese government is encouraging innovation and technology investment to modernize the financial industry, it is still trying to draw up an appropriate legal framework that wouldn’t stifle growth. The regulation of financial services in China is overseen by multiple bodies with overlapping policies and sometimes unclear guidelines. But there have been concrete developments over the last year. In July 2015, central government ministries jointly issued guidelines that clarify responsible regulatory bodies and roles, as well as legal parameters for specific sectors of fintech.

China’s fintech revolution is already making huge waves. Opportunities are abundant for those able to provide innovative solutions to address critical consumer needs. The impact of China’s fintech innovation, whether in the realm of online payment, wealth management, crowdfunding or elsewhere will be seen and felt worldwide. The foundation established by this pioneering class of Chinese fintech companies will set the stage for even more exciting players to emerge.

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting company, and the author of “China’s Disruptors” (Portfolio, 2015).
Ian Meller is a consultant at Gao Feng.

 

January 25, 2016 10:30 am JST | Nikkei Asian Review
Edward Tse, Alexander Loke and Alan Chan

An unusual hostile bid from a small property and insurance group for China’s largest listed property developer is prompting speculation that the country may be on the brink of a new era of domestic takeover battles.

The target, China Vanke, is actively trying to fend off a potential takeover by Baoneng Group, a lesser-known Shenzhen-based conglomerate that has suddenly emerged as Vanke’s largest single shareholder. The battle marks the first time in the Chinese equity markets that such a large and well-established listed company has been targeted by a corporate raider.

Chinese corporations have become increasingly comfortable in recent years with launching hostile bids for companies overseas. Examples include Guangdong Rising Assets Management’s bid for Australian miner PanAust and China Petroleum& Chemical’s move on Hong Kong’s China Gas Holdings in 2012.

However, Chinese companies have been noticeably more docile at home, perhaps because of the lack of precedent and resulting uncertainty about how hostile bids might be treated. Success for Baoneng, however, would set a precedent for similar bids by other Chinese companies. It might also mark the beginning of a higher profile role for insurers in bringing about consolidation of the property sector, among others.

Vanke’s management has labeled Baoneng’s equity purchases a “hostile takeover,” clearly worried that the group could build a controlling stake and step into the boardroom if it continues its buying spree. Wang Shi, Vanke’s chairman, has said that the company does not welcome Baoneng’s move, which it fears will harm its reputation and credibility.

Wang said that Yao Zhenhua, Baoneng’s chairman, lacked business prospects and questioned his company’s financing capacity, noting that Baoneng’s property transactions totaled only a few billion yuan in 2014 compared with Vanke’s 215.1 billion yuan ($32.7 billion) the same year. Yao has responded that Baoneng is a law-abiding company and that he believes in market forces.

Baoneng’s “barbarians at the gate” bid has posed challenges to Vanke’s corporate culture and operational style, and may harm its plans for a strategic transformation. In 2015, Vanke took its first steps toward building a new business ecosystem, including entering new business areas and adopting a trial-and-error entrepreneurial approach to searching for opportunities.

The takeover tussle has attracted enormous public interest. Chinese social media are full of chatter about its implications and there are suggestions among analysts that the bid may be part of a game being played for personal advantage between Vanke and senior executives at Baoneng.

At this stage, both companies’ actions can be presumed legitimate since Baoneng has every right to purchase Vanke’s shares in the secondary market and Vanke is justified in sticking to its view of the quality of its capital and management.

Chinese regulators are watching the battle closely. The China Securities Regulatory Commission has confirmed that it is working with the China Insurance Regulatory Commission and the China Banking Regulatory Commission to examine Baoneng’s bid in the hope of ensuring “an open, fair and just market order” and to “protect those involved, especially small and medium-sized investors’ legal interests.”

If any malicious intent crosses legal boundaries, this will likely be exposed by the authorities. Meanwhile, the bid and Vanke’s response suggest that the reform of China’s market economy has come a long way. Hostile takeover bids are an integral part of a market economy, and Vanke’s actions suggest an increasing level of confidence in dealing with them.

Share suspension

On Dec. 18, Vanke suspended trading in its shares to avoid price fluctuations and to gain time to seek outside capital or alternative partners. It said it would announce details of a major asset-restructuring plan by the end of January.

Various possible further moves were discussed in leaked internal conversations and in social media postings. These included the possible dilution of Baoneng’s shareholding through an issue of new shares by private placement.

On Dec. 23, Anbang Insurance Group, which previously owned 5.69% of Vanke, raised its stake to more than 7% by acquiring shares worth more than 2.8 billion yuan. The share purchase was followed by a public announcement by Anbang that it will actively support Vanke’s management team, including Wang, and help fend off Baoneng’s bid.

This helped to reinforce Wang and his management colleagues, who together with Anbang hold about 30% of Vanke, compared with Baoneng’s 23.52%. China Resources, a large state-owned enterprise, holds 15.23% and is also opposing Baoneng.

Wang is a well-known entrepreneur and has cultivated a high profile that has included studies at the universities of Harvard and Cambridge at an advanced age and sharing his personal experiences and perspectives with Chinese youth.

Wang has been vocal on social media sites, sharing his views on the clash of corporate interests between Vanke and Baoneng. As the parties fight for control, the battle has become a social media event as much as a corporate tussle. Revelations have included the disclosure by social media users that Wang gave an internal speech to Vanke’s employees stating that Baoneng did not deserve to be Vanke’s top shareholder.

In the main, social media has turned a corporate event into a personality clash, focusing on the character of those involved rather than the takeover itself. This aspect of the bid battle is likely to make Chinese business leaders rethink their social media strategies — especially on the crucial issue of how to get their stories out while negating or controlling any negative aspects.

Beyond the immediate corporate battle, the bid highlights the trend of Chinese insurance companies acquiring good assets and their increasingly critical role in consolidating industries. The Chinese government has been advocating supply-side economic management to consolidate overcapacity in many sectors and cull weaker companies.

Shanshui Cement Group has been at the center of a similar battle for control since April last year, when China Tianrui Cement increased its stake to more than 28%. Tianrui’s acquisition of such a large stake highlighted the potential for consolidation of the cement industry as well as corporate governance issues arising from decentralized equity structures.

Such external pressures from potential corporate raiders will encourage companies to focus more on improving productivity, management capabilities and asset utilization. How the confrontation between Vanke and Baoneng pans out will serve as a test for China’s capital markets and corporate governance. The end result should solidify China’s development of a more transparent and stable market economy.

Edward Tse is founder and CEO of Gao Feng Advisory, a global strategy and management consulting company, and author of “China’s Disruptors” (Portfolio, 2015). Alexander Loke is a consultant at Gao Feng and Alan Chan is a senior consultant there.

 

Hong Kong Must “Deploy or Die”

January 11, 2016 7:30 pm JST
Edward Tse and Sunny Cheng

Hong Kong finally set up an official bureau of innovation and technology in November after several years of seeking legislative approval.

Value creation through innovation will be critical for Hong Kong to generate sustainable growth. Since its handover to China in 1997, the territory has relied on a narrow range of industries, including tourism, retail and financial services, for growth. It has become clear however that this formula cannot carry the economy forward.

Prof. Nicholas Negroponte, founder of the renowned MIT Media Lab, demonstrated that he could move an image displayed on a cathode-ray tube monitor with his finger about 30 years ago. Today, even a three-year-old can swipe and move images on a tablet but at the time, Negroponte faced the challenge of just convincing others this was possible. The lab’s motto was “demo or die.”

In 2011, Joi Ito became the director of the MIT Media Lab. Joi is an innovator and has been in and out of college, each time leaving to pursue something more interesting than a degree. When the March 2011 tsunami struck Japan, Joi was in Boston while his wife was about 200 miles away from the damaged nuclear reactors in Fukushima Prefecture. He and many others were concerned about the environmental effects of radiation, so he and some friends jointly created an information-sharing website.

They also started scooping up Geiger counters to measure radiation. When supplies dried up, they decided to build their own. Within a month, 25 people from all over the world started working on a low-cost, innovative Geiger counter. Soon they were producing an open-source device that could fit into a lunch box. These new meters collect data and upload it to Safecast, a new web-based network to share readings. Within a year, the network had collected over 3 million data points.

The group then raised some money through funding platform Kickstarter and began making sturdy low-cost Geiger counters for the mass market. In three years, Safecast has collected over 16 million data points, making it the largest environmental monitoring network in the world. This demonstrates that when governments, nongovernmental organizations and experts are ineffective, citizen scientists can step up. In this case, such volunteers created a giant collaborative network in record time.

When Ito took up the MIT Media Lab job, he changed its motto to “deploy or die.” The Safecast radiation monitoring project is a good example of this new way of doing things. Situations can evolve too quickly for forward planning, but possessing the wherewithal to ad lib is the new way ahead.

Competition is rife today. In particular, competition with Chinese enterprises can be challenging. The Chinese government ensures that initiatives it implements are executed within the scope of official five-year plans. When the Chinese set a goal, they do whatever they must to achieve results. Chinese companies often follow the direction of change highlighted when the government issues a new five-year plan.

The latest plan for 2016-2020 highlights innovation as the engine for sustainable economic growth. Entrepreneurship has been growing in China, with 19% more new businesses formed in the first half of 2015 than a year earlier. The tech sector has significantly overtaken the industrial sector, recording 10% growth compared with the latter’s 4%.

Beyond just Alibaba Group Holding, Baidu and Tencent Holdings, China’s entrepreneurship scene is extremely dynamic, with many up-and-coming, exponentially growing players already disrupting the order set by older counterparts, which must constantly reinvent themselves to survive.

If Hong Kong doesn’t take advantage of the new five-year plan pending before the National People’s Congress, it will fall behind. Hong Kong must change rapidly and adapt. It must live by “deploy or die.”

Hong Kong politicians need to adapt to new political realities. Voters are often swayed by opinions on social media as they go viral. The government must be able to react. It can no longer afford six months to study conditions and another six months to write policy papers.

South Korea, at the forefront of technology in the Asia-Pacific region, has the world’s fastest average broadband connections, coming in at 23.6 megabits per second with Hong Kong following closely behind at 16.7 Mbps, according research by cloud computing services company Akamai.

However, on the mobile network front, Hong Kong comes in only at the sixth place in the region, with an average mobile network connection of 6.5 Mbps, behind South Korea, Japan, Singapore and others. Hong Kong is only now setting plans for fifth-generation mobile networks while South Korea already began preparations in early 2014. South Korea also has a thriving startup community with at least 10 software startups valued at more than $1 billion. Meanwhile the Japanese government is actively investing in self-driving automotive technologies in the hopes of taking the lead in the next industrial revolution.

Hong Kong policymakers are often restrained by unwritten rules and unable to think creatively. This applies to the way they approach innovation. “Crowdsourcing” is an effective way to find ideas. This has worked for South Korea and many innovative projects elsewhere, and Hong Kong must learn to adapt in the same manner.

The Australian government is a pioneer, committed to crowdsourcing with a dedicated taskforce, as well as equity crowdfunding initiatives. It is also one of the first governments to adopt Creative Commons licensing that allows open access and free licensing for intellectual property creators. The Singapore government has been engaging citizens with open public initiatives since 2010 as a cost-effective dual government-citizen approach to unlock social innovation and technological advancement.

Hong Kong must follow these examples and cut through bureaucratic walls and financial silos. Let ideas drive Hong Kong forward and cut red tape. Opportunities abound. Capturing the opportunities will require the right mindset.

Edward Tse is founder and CEO of Gao Feng Advisory, a strategy and management consulting company, and author of “China’s Disruptors” (Portfolio, 2015). Sunny Cheng is a Hong Kong-based environmental technology