Private companies: not free of government control - Paul Gillis

Paul Gillis

The Hangzhou government raised eyebrows as it announced last week it would send 100 officials to private companies to check on them. Professor Paul Gillis at Peking University’s Guanghua School of Management did not see that much news, he tells Bloomberg.

Bloomberg:

Government agencies may also be heightening their monitoring of the vast private sector at a time the Chinese economy is decelerating — raising the prospect of destabilizing job cuts as enterprises try to protect bottom lines. 

Alibaba is hosting its annual investors’ conference this week in Hangzhou against the backdrop of a worsening outlook for the country. 

“They might be checking whether the [Chinese] Communist Party [CCP] units are working effectively within the companies,” said Paul Gillis, a professor at Peking University’s Guanghua School of Management. 

“While China legitimized capitalism, the level of government influence was never intended to disappear. Occasionally private entrepreneurs forget about this and are reminded of it,” Gillis added. 

Zhejiang is considered the cradle of modern Chinese private enterprise, home to a generation of self-made billionaires from Alibaba’s Jack Ma (馬雲) and Geely founder Li Shufu (李書福) to Wahaha’s Zong Qinghou (宗慶后).

More in Bloomberg.

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Chinese consumers prefer German over American brands - James Roy

James Roy

Especially in the car industry, American brands are fighting heavily with their German competitors. And the Germans are doing better tells retail analyst James Roy to Bloomberg.

Bloomberg:

Mainland buyers have traditionally equated luxury with German nameplates. Volkswagen-owned Audi is China’s top luxury brand, with 30 percent of the high-end market in 2015; BMW is No. 2, with 25 percent; and Daimler’s Mercedes-Benz line is third, with 20 percent. 

Cadillac is far behind, tied with Chinese automaker Geely Automobile Holdings’ Volvo at No. 6—they each commanded 4 percent of the market last year, according to Bloomberg Intelligence. Lincoln had less than 1 percent. “There really is a solid association in Chinese consumers’ minds with the premium German brands,” says James Roy, associate principal of China Market Research Group. “American cars are viewed as fine and good and functional, but they don’t have that premium image.”... 

President Xi Jinping’s campaign against corruption and conspicuous consumption among officials may also provide an opening for U.S. cars. “Consumers are trading down,” says Roy of China Market Research Group. “People are not looking to be as obvious or flashy with their wealth as before.”

More in Bloomberg.

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How Geely bought Volvo - Joel Backaler

+Joel Backaler 

In his book China Goes West: Everything You Need to Know About Chinese Companies Going Global author Joel Backaler describes how Geely bought Volvo. An example of how China´s business leaders do things differently. From an excerpt at his weblog.

Joel Backaler:

Ever the ambitious visionary, Li (Shufu, Chairman of Chinese automaker Geely) had his sights set on Volvo early. Through Li’s research, he had learned Volvo was never a strategic brand for its American owner, Ford Motors. This is because Ford has been and remains primarily a mass-market car company; as a premium brand, Volvo was out-of-reach for many of Ford’s target consumers. As early as 2002, Li began contacting Ford, to try to convince them to take his intention to buy Volvo seriously. He sent letters to Ford’s senior management and networked with them at auto shows, but without success. Li took his first trip to Ford’s headquarters in Detroit to visit its Chief Financial Officer in 2007, but he did not receive a warm welcome. Instead, Li was met with concerns about his ability to raise sufficient capital for a deal, and was reminded of the fact that Geely was a relative unknown in the West. At the time of his first visit Volvo was not nearly as troubled as it was about to become, but Li had his heart set on acquiring the Volvo brand from Ford at all costs.It wasn’t until the 2008 global financial crisis occurred that Ford’s leadership finally became receptive to Li’s proposition. Li began to rack up miles on overseas flights to Detroit and Gothenburg, Sweden, where Volvo was based. To appease Volvo’s senior management, Li committed early on to ensure Volvo’s headquarters stayed in Sweden and its leadership team remained intact. Geely’s acquisition of Volvo would keep 16,000 local employees at their jobs. Back in China, Li communicated with regulatory authorities to make them aware of the potential acquisition and procedural obstacles before they arose later on to impede the deal’s progress. Li effectively painted the picture of a win-win situation for all parties involved in the acquisition. In fact, many of Li’s fellow Chinese automotive executives believe that one of the greatest talents he brings to the table is public relations. 

Li also wooed the Swedish leadership team of Volvo by emphasizing the vast untapped potential of the Chinese auto market. He argued that while the US, Germany, and France had all been major markets for Volvo in the past, they were highly competitive and increasingly saturated. China was not only the world’s largest auto market; it also had tremendous growth potential given China’s historical absence of car ownership. There were 62 million automobiles on China’s roads in 2009, which some projected would grow to reach 200 million by 2020. By selling China as the world’s largest automobile market, Li helped paint a path of opportunity for future growth, and a chance to make Volvo profitable in China. Li also underscored the potential for selling Volvo’s European premium brand to China’s growing population of luxury consumers. With Li offering the localized know-how to navigate the intricacies of doing business in China, Volvo’s management saw how they could benefit from the acquisition by Geely. 

In August 2010, the farm boy from Hangzhou, China, officially acquired the movie star from Gothenburg, Sweden, for $1.5 billion. By 2013, China became Volvo’s most profitable market, where it produced 42,000 automobiles. Doug Speck, Senior Vice-President of Sales and Marketing for Volvo told the Financial Times in a 2013 interview: “We expect a significant bump-up from localization.” Management expects annual sales to increase to 200,000 by 2015 after the Chinese government officially recognizes Volvo as a local firm through Geely’s ownership in 2014. Li Shufu fulfilled his commitment to open new markets for Volvo, while acquiring a global luxury car brand to help boost Geely’s international image.

 More at the China Business Review.

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Why China bought American movie theaters - Shaun Rein

Shaun Rein

Wanda's purchase of AMC Theaters raised more than a few eyebrows in the US? Is China buying a backdoor to execute its soft power?  Business analyst and author Shaun Rein explains in Foreign Policy what is behind this and other high-profile corporate purchases by Chinese companies.

Shaun Rein:

Unlike Japanese companies in the 1980s, which believed in the superiority of their own management techniques and sought to replace senior teams at American firms they bought out, most Chinese companies are keenly aware that they lack international-standard best practices. They acquire companies primarily for brand equity and as a learning opportunity. When Lenovo bought IBM's ThinkPad line, then the largest producer of laptops, there were few layoffs; Lenovo actually hired executives from Dell to run operations... 

Wanda's acquisition, like China Bright Food's purchase of the British food brand Weetabix and the Chinese auto company Geely's purchase of Volvo, shows Chinese brands want to acquire global brands rather than the painful, often multi-decade process of building them organically. Chinese companies have the cash and ambition to expand overseas, and are not afraid to do so through mergers and acquisitions. They are looking to become "truly global" -- as Wanda chairman Wang Jianlin recently said the AMC deal would make his company. Americans need to be ready for more of these purchases and understand that Chinese companies are looking out for their own profit and loss column.

More in Foreign Policy.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

More on Shaun Rein and The End of Cheap China, at Storify.

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