2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata D-ZHOU
A “New Normal” in China’s Economy and Corporate Strategies
Li ZHOU 周立 Assistant Dean 助理院长 CKGSB 长江商学院
Agenda
A “New Normal” in China’s Economy
A “New Normal” in Chinese Companies
Overview
The Fosun Case
CKGSB-A Global Business School for Global Leaders
Conclusions
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©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata D-ZHOU
A New Normal in China’s Economy
New Normal in China’s Economy
Old New Economic Growth 10% 6.5% Role in the Global Made in China Sold in China Economy (Factory) (Market) Capital Flows To China From China High Growth Sectors Industrial Services Higher Growth Cities Coastal Inland
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Firms with Severe Excess Capacity
Source: “China’s Industrial Economy Report, 2015 Q3 Survey” led by Prof. Gan Jie, Center on Finance and Economic Growth, CKGSB
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Challenges of China’s Industrial Firms
Source: “China’s Industrial Economy Report, 2015 Q3 Survey” led by Prof. Gan Jie, Center on Finance and Economic Growth, CKGSB
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Services as a Part of GDP
16 60
14.2 14 Services, etc., value added 50 12.7 (% of GDP) 12 10.6 Industry, value added (% of GDP) 40 9.6 9.5 10 9.2 8.4 7.8 7.7 8 7.3 30
6 20 3.9 4
Agriculture, value added 10 2 (% of GDP)
0 0 1990 2000 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: World Bank
The Future of “Sold in China”
Consumption 35% of GDP in China vs 50-55% of GDP in other countries at similar stage of development USD 15 trillion if consumption becomes 50% of GDP in China, largest increase in world history Middle class Lower level: USD 9,000-16,000 household income • 54% of city households in 2012 • 13% in 2020 Upper level: USD 16,000 (Brazil) -34,000 (Italy) household income • 14% of city households in 2012 • 54% in 2020 • Foreign brands, quality vs price • Entertainment • Overseas trips • By 2020, there will be more than 200 million Chinese tourists going overseas.
Source: McKinsey
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A “New Normal” in Chinese Companies
SOEs vs non-SOEs
98 Chinese companies made the Fortune 500 list in 2014 2nd highest after the US 75 SOEs incl. in the top 12 GDP: less than 40% by SOEs Number of SOEs: 150,000 Total Assets: RMB 100 trillion ($15.7 trillion) Employees: 30 million
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A “New Normal” for SOE Reform
Step 1: Categorization a) Group A: “strictly commercial entities” b) Group B: “those that serve governmental ends, such as power and healthcare suppliers” Step 2 and + (anticipated): Consolidation • Reduce the number of SOEs Privatization • Mixed ownership Governance • Professional management • “Leadership of the Chinese Communist Party” Globalization • Export infrastructure-building capabilities (One Belt, One Road) • Financing (AIIB)
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Non-SOE Companies: 4 Generations
G e.g. Found Business Leader Revenue Profit Globalization Innovation ($ bill) 1 Lenovo 1984 Computer 71 $33.9 b $0.6 b ‐ M&A (IBM Smart Phone Motorola ) ‐ No.1 PC vendor Huawei 1987 Telecom 71 $34.9 b $2.4 b ‐ 75% revenue No1 int’l patent Equipment ‐ No. 1 tel. eq. applicant vendor 2 Tencent 1998 On‐line and 44 $12.9 b $3.9 b ‐ Via mobile WeChat mobile VAS internet Alibaba 1999 E‐commerce 51 $12.3 b $3.9 b ‐ Via Internet Business model
Fosun 1992 Investment 49 $9.6 b $1.1 b ‐ Investment Investment model 3 DJI 2006 Aerial 35 $0.5 b (?) ?? 70 percent of the All invented and Photography global market for developed in civilian drones China 4 ??? 2010+ Internet+ Late ‐‐‐ Start overseas? ?? 12 20s
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Chinese Companies’ Overseas M&As
Overseas Investment/GDP 50%
40%
30%
20%
10%
0% China 中 Japan 日 US 美国 Germany 国 本 德国
Sources: Bloomberg, PWC
China’s Outbound Investment
Before 2009 After 2009 China in the World • Factory • Market
Primary Reasons • Resources • Moving up the value chain • Raw materials • Attractive pricing
Primary Investors • SOEs • SOEs in infrastructures • POEs
Primary Targets • Developing • Developed countries countries • Developing countries
Industries • Coal • High‐tech • Metal • Services 14
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Challenges when Going Global
Shortage of global managers
global mindset and practical experience,
language skills and cultural skills
legal and regulatory environments lack of a well known global brand Misconception of China in other countries Unfamiliarity to the local political and social crisis in other countries Foreign exchange controls in China (much less now)
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The Fosun Case
On the basis of two cases written by CKGSB Case Center under the supervision of Dean Xiang Bing and Prof. Mei Jianping
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Company Background
Established in 1992 as a market survey company by Guo Guangchang(郭广昌), Liang Xinjun (梁信军) and a few other students of Fudan University in Shanghai. The company entered medical, pharmaceutical and real estate industries after 1995. Corporate strategy at the early stage: invest in leading companies in high-potential industries, such as mining and retail, selling at a very early stage and benefiting from the later exponential growth of those industries after restructuring and IPO. Guo Guangchang became a participant of CKGSB’s CEO Program in 2005. Liang Xinjun received his EMBA degree from CKGSB in 2007. Fosun International went public on the Hong Kong Stock Exchange in 2007. In 2009, Fosun became the 2nd largest privately-owned enterprise in China with annual revenue of RMB 40.2 billion. In 2010, Fosun International started leading the globalization trend of Chinese privately-owned companies by announcing its new strategy of “combining China’s growth momentum with global resources”.
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Path to Globalization
1992: 2007: 2012: 2014: 2015: 4 Fudan University • Yong'an P&C • Pramerica Fosun Life •Fidelidade •REN •Club Med graduates founded Insurance Insurance •Secret •Tom Tailor •Thomas Cook Fosun • Hainan Mining • Peak Re Recipe •ROC Oil •Ironshore • Minsheng Bank •BHF-Bank •IDERA •MIG* •Osborne •Hainan •Cirque du Soleil •Studio 8 Mining IPO •Phoenix Holdings • Tomatu
1994: 1998: 2003: 2004: 2008: 2010: 2011: 2013: Nanjing Zhaojin • Focus Club Folli Follie • Fosun • Fosun • St. John • Liberty 28 Pharma Pharma A Steel Mining Media Med • Alma Lasers •Lloyds •Forte share IPO •TJT • Saladax Chambers • Caruso • Atlantis
Notes: 1. The above-mentioned companies/projects include investments made by Fosun, its subsidiaries and funds under its management; 2. Modified from a Fosun presentation.
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Fosun’s Globalization Strategy
Goal: to become a world-class investment group Overall strategy: “Capitalizing on China’s Growth Momentum by Leveraging Global Resources” Developing capabilities in two “drivers”: “insurance-oriented comprehensive financial capability” “global industrial integration capability taking roots in China”
Global Resources Lifestyle InsuranceInsurance China Growth Momentum Fashion Capital Integration
Investment
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Selected Firms Fosun has Invested in
Chinese companies listed on overseas markets Focus Media Tongjitang Chinese Medicines (TCM)
Foreign companies invested in Club Med, a French company in high-end tourism Folli Follie, a Greek company in fashion industry St. John, a US women’s fashion company Caruso, an Italian men’s fashion company Tom Tailor, a German retailer Studio 8, an American film and video company in Hollywood Osborne, a Spanish ham and wine company Cirque du Soleil, one of the best-known performing arts companies from Canada BHF Kleinwort Benson, a German company specialized in private banking Hoshino Resorts Tomamu, a Japanese ski resort
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Fosun and Club Med
In 2009, Club Med started looking for a Chinese partner because The number of customers from China grew by 24% while the overall no. of tourists dropped by 9% after the financial crisis (US: -18%, Japan: -15%), only 1/60 of total customers The average spending per customer per day was 142 euros, higher than American and Japanese customers No resorts in China Criteria for selecting a Chinese Partner • Media and marketing capability • Relationship with the government • Investment in real estate industry Rationale on the Fosun side High potential of the Chinese tourism market Club Med’s brand and unique business model Attractive price on the stock market (PB=0.65 EV/EBITDA=6.5 Accord Hotels=11) In 2010, Fosun acquired 7.1% of the shares of Club Med at the price of 28.28 million euros and became the 3rd largest shareholder. (The largest and second largest shareholders had 10% and 9% shares, respectively.) 21
Fosun and Club Med – After the Deal
Overall attitude: “a facilitator not a controller” (Guo) Expand the Chinese Market More than 10 New Resorts in China and overseas for Chinese customers • Synergy between Club Med and Fosun’s vacation properties Marketing • Targeted marketing at institutional clients, such as business associations, membership clubs, associations, chambers of commerce, banks, etc. • Marketing events and advertisements by Fosun and its media Global Integration Global sourcing • Reduced costs by 40% by purchasing in China • Purchase from Fosun companies in China, e.g. staff’s clothing purchased from Yuyuan Global sharing of human resource • Employees of Fosun’s companies in China transferred to Club Med in China and in other countries Results Sales in China grew from 2% per year to more than 50% per year. Global net profit, as a result of global integration with the China factor, grew by 312% in 2011 Fosun became the prime owner (98%) of Club Med in 2015 .
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Fosun-Yuyuan Tourist Mart and Tomamu
Hoshino Resorts Tomamu ( 星野) A high-end ski resort in Hokkaido, Japan, • 757 hotel rooms, • 25 ski trails • 18-hole golf course Revenue in 2014: JPY 6,137 million Net profit: JPY 701 million Major shareholders: • Matakite B.V. (80%), • Hoshino Resorts Tomamu (20%). Yuyuan Tourist Mart (豫园商城) Originally a group of markets at one of the hottest tourist spots in Shanghai A listed company covering a wide area of industries, including jewelry, restaurants, department stores, food, real estate, import and export and investment More than 37 million tourists visit Yuyuan Tourist Mart every year Fosun became the largest shareholder in 2002 Fosun acquired 100% of Hoshino Tomamu shares at the price of JPY 18,358 million or RMB 947 million 23
Market Potential
Purchases by foreign tourists in Japan increased by 82% in the period of June to September in 2015 and reached JPY 1 trillion Mainland China:46.6% Taiwan: 13.8% Hong Kong: 8% All three: 68.4% In 2022, China will host the Winter Olympics. Skiing is expected to become a more popular sport in China.
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Latest Strategy of Fosun
Added finance/wealth management to the China portfolio Added other emerging economies in Asia
Emerging Economies in Asia
Global Resources Health InsuranceInsurance China Growth Momentum Happy Capital Integration Finance
Investment
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CKGSB‐A Global Business School for Global Leaders
©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata D-ZHOU
CKGSB 40+ 20+ 70+ 300+ full-time professors professors once global academic innovative case tenured at top global awards by faculty studies institutions
. CKGSB’s faculty . World-class faculty . Emphasis on research . As the world’s thought represent the best in members, a large allows for two-way traffic leader on China, CKGSB global business percentage of whom are that bridges the has published over 300 education natives of China and knowledge gap between cases through its 12 have held distinguished, East and West research centers, . Mastery of Eastern and tenured positions at top covering topics such as: Western business institutions . CKGSB draw’s on its practices and theories faculty’s expertise on ̶ Competition and issues of global collaboration in China . Emphasis on research: relevance: global ̶ Global implications of faculty continue to focus governance, exponential China’s development on research during their technologies, income ̶ Response of MNCs to professorships at inequality, and the rise of China CKGSB sustainable development. ̶ Chinese financial markets
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CKGSB-Network
More than 50% of CKGSB’s alumni are at the CEO or Chairman level and, together, their companies accounted for 1/6 of China’s GDP in 2014.
6,000+ EMBA 600+ MBA 9,000+ 80% above VP‐level 25% international Chinese Executive Education >50% are CEOs & Presidents
1,500+ 100+ DBA English Executive Education 50% from firms with assets 10% on boards of MNCs >$1.5Bn
CKGSB’s alumni group is recognized as one of the most exclusive in China, with a particular focus on the “top of the pyramid”
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CKGSB‐Selected Alumni
Jack Ma Li Dongsheng Charles‐Édouard Bouée Liang Xinjun Founder and Chairman and CEO, President, Roland Vice Chairman and Chairman, Alibaba TCL—Leading Berger Strategy CEO of Fosun Group electronics company Consultants—the Group—China’s world’s leading largest private‐ global owned consultancy conglomerate from Europe
Sun Yiping Liu Qing Ralph Speth Zhou Hongyi CEO, Mengniu Group President, Didi CEO, Jaguar Land Chairman and CEO, —one of the leading Kuaidi—China’s Rover—UK's largest Qihoo 360—One of dairy product largest car‐hailing automotive China’s top manufacturers in app manufacturing search engine / China business antivirus companies
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CKGSB‐CEO Program in 2005
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Globalization of CKGSB Alumni
Globalization has been one of the cornerstones of all CKGSB’s programs Examples of overseas M&As led by CKGSB alumni One of the first major deals by a Chinese company: China National Overseas Oil Company (CNOOC) for Unocal in the US led by Fu Chengyu blocked by the American government China Motion led by Chen Yihong acquired Phoenix in Japan Recent cases Benteng led by Liu Jianguo acquired Honma Tokyo International Medical Clinic invested by CKGSB alumni in Zhejiang A JV with Nakamura Tokichi Honten in Hong Kong, first time in the history of the 160+ year-old Japanese tea and noodle store 3D bio printing by working with top scientists
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Globalization of CKGSB
CKGSB’s world-class faculty help the school develop equal partnerships with other leading educational and research institutions around the world, such as Columbia Business School Harvard Kennedy School IMD The China insight developed by our faculty with their strong research capabilities and deep roots in China’s business world, especially from their interaction with CKGSB’s students and alumni, allow the school to offer successful educational programs for the global leaders today and tomorrow: Sir Tom Hunter, first self-made billionaire in Scotland Ralph Speth, CEO, Jaguar Land Rover Malcolm Sweeting, Senior Partner, Clifford Chance VPs and other execs from Apple, Estee Lauder, Tiffany, Morgan Stanley, etc. English-language Programs Dual EMBA with IMD (part-time) MBA Program (full-time) Customized Programs 32
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Conclusions
A Bumpy Road to a Brighter Future
Short-term headwinds make it more urgent to introduce reforms, that have been postponed due to resistant forces The primary growth driver will come from consumption, especially in the services sector Chinese companies are moving up the value chain by G and I
Globalization
Innovation Chinese companies are discovering an increasingly globalized business world, although sometimes in an expensive way Chinese students and scholars who have studied, worked and lived in other countries, will continue to play a significant role
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Entrepreneurship-The Driver of All Growth
Entrepreneurship Intention of Selected Economies (2009 & 2014) 25% 22.60%
20% 19.33%
15.90% 15% 14.20% 12.08%
10%
6.90% 6.88%
4.30% 5% 3.53% 3% 2.52% 2.40%
0% Japan China Russia US UK France
2009 2014
35 Source: Globe Entrepreneurship Monitor
Thank you!
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