The Transformation Of Chinese Enterprises Has Become Particularly Urgent: Cross-Border Becomes The Focus

As China's economy enters a downward cycle, the industry faces dual pressures of upgrading and capacity reduction; At the same time, China has become a net exporter of capital, and there is a strong demand for enterprises to allocate assets overseas. At such a time point, the transformation of Chinese enterprises has become particularly urgent. Recently, the reporter interviewed Mr. Chen Zhaofeng, a management consulting partner of PricewaterhouseCoopers in China, who has provided transformation consulting for many Chinese enterprises, and asked him to talk about his observations on some remarkable transformation cases in recent years, the transformation of large state-owned enterprises, and the role of the national "baton". The following is the interview record:

Reporter: What are the common paths for the transformation of Chinese enterprises? What kind of enterprises are suitable for each path?

　　 Chen Zhaofeng : I think there are three dimensions of enterprise transformation: horizontal, vertical and cross-border. Horizontal transformation is to expand products and services horizontally. For example, Haier has expanded from only making refrigerators to washing machines and other white goods, and then expanded to the so-called "3C industry", which is an information appliance industry integrating computers, communications and consumer electronics. Vertical transformation means that enterprises are no longer limited to a certain part of the industry. For example, in the manufacturing industry, only processing trade adds less value. It can be expanded upstream of the industrial chain to engage in technology research and development, product design, product appearance packaging, or it can be expanded downstream to set foot in brand building and channel construction, from traditional OEM (OEM production) to ODM (OEM production), OBM (private brand). There are several manufacturers in China that used to be engaged in garment processing, such as Anta, 361 Degrees and Seven Wolves. Now they have achieved relatively successful transformation in this regard through their own designs and brands.

Cross border transformation can be cross industry or cross region. For example, manufacturing enterprises can do equipment related financial leasing and transform investment into the financial sector. For example, manufacturing enterprises cooperate with the Internet, or directly invest in Internet+. Another example is O2O in recent years, which connects online and offline. Retailers doing e-commerce is the most typical. The most typical regional expansion is "going global" overseas market development.

Among the three ways, horizontal and vertical transformation is easier and more common. Cross border transformation should be paid attention to, because enterprises may not be familiar with the new market, and are more likely to fall into the trap. For example, some Chinese enterprises have gone overseas to make large mergers and acquisitions, but because of insufficient prior research or inaccurate prediction, they have suffered a lot later. Especially in some resource-based projects, or some large-scale infrastructure projects, we have seen many cases of failure.

　　 Reporter: At Chinese enterprises Among the transformation cases, Wanda is an eye-catching one. Does it have any advantages in transforming from a real estate developer to entertainment, content and sports?

Globalized Chinese enterprises have formed a new pattern of globalization. According to the Report on Globalization of Chinese Enterprises (2016), Chinese enterprises have ushered in a "golden period" of foreign investment, and show many new characteristics.

Chen Zhaofeng: I think Wanda's transformation has at least succeeded in the first step. It was the first to do residential real estate. When it found that the competition was fierce and it was difficult to expand rapidly, it turned to commercial real estate, developed Wanda Plaza, and replicated in many cities. Then it found that commercial real estate is an industry with heavy assets, capital and investment. A Wanda Plaza will invest billions at least and tens of billions at most. Where does the money come from? The cost of financing is so high. And when the plate gets bigger, the management will also face challenges. At the same time, it found that one way to attract people to the commercial plaza is to open cinemas, and China's cinema line is not particularly developed, so it invested in AMC in the United States, the world's second largest cinema line. Then it expanded to the upper reaches of the film industry, investing in film production to provide content for cinemas. Then it found that in order to occupy a leading position in the cultural and creative industries, first it must be international, and second it must target the Chinese market. So it invested in Legendary Film, an American film production company, and also invested in Qingdao Cinema, hoping to create an "East Hollywood" in China. It can be seen that the first step of Wanda's transformation - from commercial real estate to cultural and creative industries - has been successful. According to its published data, its business income in cultural and creative industries has exceeded 50% of the whole group.

At the same time, its real estate business is also in transition. Through the launch of REIT, it has changed from a commercial real estate developer to a fund management and project management company, from the original business model of valuing assets and funds to the asset light model.

Reporter: Like Wanda Will such enterprises have the boundary of transformation?

Chen Zhaofeng: I personally think that transformation still needs to gather relevant competitive advantages. It is now doing cinemas, cinemas and film investment, at least in the same line. As a sports industry, at least it has not seen the scale or differentiated layout, which may not be as logical as investing in films.

Reporter: Wanda is a private enterprise that makes money. What are the transformation modes of traditional enterprises, especially large state-owned enterprises, which are already in financial difficulties and facing market surplus?

　 Chen Zhaofeng: In fact, every enterprise can find a new world through transformation. One of our clients, China National Chemical Corporation, is a very traditional manufacturing enterprise in the chemical industry. It not only needs to reduce production capacity and leverage, but also shoulder the social responsibility of state-owned enterprises, which is a great challenge. It first bought many advanced products and technologies to improve itself through a series of overseas mergers and acquisitions. Of course, the premise is that it has sufficient funds. But what I really appreciate is its other innovation. People may not know that Malan Ramen, which can be seen all over China now, is a brand created internally by ChemChina when it placed redundant employees. Because many employees of ChemChina have worked in Lanzhou, they thought of making Lanzhou Ramen into a chain brand, allowing laid-off employees to choose freely, and see whether they would like to be a small boss to run a chain store. As a result, Malan Ramen has blossomed everywhere and done well.

An enterprise can always find its most competitive business. If it is good at making a mold, it should only make molds, and not pull the battle line too long. In the manufacturing industry, the gross profit of a finished product may not be that high relatively, but the gross profit of components and parts of the upstream level 1 and level 2 is higher, so we should focus on the more valuable part.

Reporter: There are many state-owned enterprises that are already burdened with heavy burdens. They may not even have funds for staff placement, nor have any technical advantages. They basically rely on blood transfusion to survive. How does such an enterprise transform?

　 Chen Zhaofeng: Industry integration is still in its early stage in China, and many state-owned enterprises can do more internal integration. Under the group headquarters of many state-owned enterprises, there are Level 1, Level 2 and Level 3 enterprises, each of which has its own factory and its own sales, finance and logistics suppliers, all operating independently. However, the functions of finance, human resources, IT and procurement logistics can be shared within the group. For example, factory A and factory B belong to the same group company. Factory A produces product A, and there is a sales team of factory A, factory B produces product B, and there is a sales team of factory B. You can not move the production department, but integrate the sales teams of the two factories, share the potential customer base, and sell A and B products at the same time, so there is room for efficiency and value added. This is just integration within an enterprise, and the other is industry integration. Many industry enterprises should now integrate together to better develop their strengths and offset their weaknesses through scale effect.

　　 Reporter: One of the weak points in the upgrading process of China's traditional manufacturing industry is the brand. Even though the product quality is quite good and there are markets overseas, some consumers will regard it as not high-end enough in China. How can I mend this short board?

　　 Chen Zhaofeng: Multi brand strategy can be considered. An example is Anta, a manufacturer of sports shoes and sportswear in Fujian. If the market is regarded as a pyramid, Anta is at the bottom of the pyramid, which is the most popular, relatively low, and probably more popular brand in the second, third, and fourth tier cities. It may not be able to do so in the face of more fashionable customer groups in big cities. So it bought the brand use right of Italian sports brand FILA in China, which is quite foreign. Then it found that Chinese people are now upgrading their consumption, and they will climb mountains and ride bicycles on weekends. So it recently established a joint venture with KOLON, a high-end outdoor brand in South Korea, to launch KOLON brand clothing in China. It is responsible for the operation and manufacturing of the back-end. This brand is not only high-end, but also targeted at the new outdoor market.

Another example is Haier refrigerator. Many Chinese buy refrigerators from Siemens because they think it is a German brand. In fact, Haier's refrigerator technology is very good, but it is positioned as a popular brand in China. How to break through? It adopted a dual brand strategy, launched the independent brand "Casati", and hired a team to design in Italy. In fact, it was made by Haier. Under this strategy, I can eat in the mass market, and I can also eat in the middle.

　　 Reporter: In the global CEO survey conducted by PricewaterhouseCoopers last year, one result shows that Chinese entrepreneurs are not as confident as other international peers in how to improve their enterprises with digital technology. What is the reason behind this?

　　 Chen Zhaofeng: Among Chinese executives, 67% have a clear vision of using digital technology to enhance competitiveness. Although this figure is good, it is much lower than the global level (86%) and the US level (92%). I think there are several reasons: First, many Chinese enterprises are still traditional enterprises and have little contact with the Internet. The number of executives in these enterprises is more than 50, 60 and 70, and their acceptance of disruptive technologies is not so high. The second reason is related to the competition pattern of the whole Chinese market. There are several giants in both the telecom market and the Internet market, and other enterprises can participate in it. However, if they want to take the lead, they will feel difficult and constrained by others. The third reason is that the speed of technological change is really too fast. Many people do not have a good judgment on the subversion of technological progress, so they will be anxious and dare not move.

　　 Reporter: Another interesting finding from last year's survey is that Chinese executives believe that the three foreign countries that are most important for their growth in the next 12 months are the United States (34%), India (12%) and Cambodia (10%). What does this mean?

　　 Chen Zhaofeng: These three countries represent three different development directions of Chinese enterprises. The United States, because its economy has recovered, is also the world's largest market, and Chinese enterprises are least involved in the United States market, where there is still a lot of space, so it is most concerned. India is a developing country with a fast growth rate, a large and young population base, and within the scope of China's "Belt and Road", so it represents an overseas market that can absorb a large number of exports from Chinese enterprises. Cambodia is a destination market for Chinese enterprises to realize industrial transfer because its market has been opened, sanctions have been lifted, it is friendly with China, and its manufacturing costs are relatively low.

　　 Reporter: The "Belt and Road" strategy proposed by the Chinese government has been interpreted by some media as that China should export its excess or even eliminated production capacity to countries along the line in the process of industrial upgrading and transformation. What do you think?

Chen Zhaofeng: If you go out, you must take good things out, otherwise people will not want them. Is China's nuclear power output surplus capacity now? no Is high-speed rail overcapacity? no The large aircraft to be exported in the future, some distinctive cars, and home appliances are all valuable manufacturing services. Many small and medium-sized enterprises are embracing the "Belt and Road" strategy. For example, one Chinese mobile phone manufacturer went to Southeast Asia to establish its own mobile phone brand, and another enterprise went to Southeast Asia to produce and sell digital products such as USB, which also did well. Because the market competition in Southeast Asia is relatively small, these manufacturers have started instead. On the contrary, if we go to Europe and the United States first, the competition may be too fierce. According to the global CEO survey conducted by PricewaterhouseCoopers this year, nearly 60% of Chinese executives believe that the "Belt and Road" will bring them investment opportunities.

　　 Reporter: For industry Transformation and upgrading The Chinese government also proposed the "Made in China 2025" strategy. However, we have seen cases before where industrial policies are not very successful. For example, China's photovoltaic industry has experienced ups and downs. How long should the national baton extend in terms of industrial transformation and upgrading?

Chen Zhaofeng: I think it is good that the country has a big development vision. China's economy is still dominated by state-owned enterprises, so it is a good thing for the state, together with the participation of state-owned enterprises, and some financial funds to subsidize and support in this direction. But the national policy should not restrict who can do what, who can't do what, what should be done and what should not be done. If you look at the 2025 plan in detail, it is highly positioned, but there are few details of operability, which also gives enterprises room to imagine. However, enterprises can't just go in and out of the country. It depends on whether they have competitive advantages in that field, technology, money, brand, channel and market.

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