Is the Chinese business scene really a copy of US capitalism?
The answer is a resounding no. Of course, there are lots of “capitalist” companies in China, there are lots of people in it for the money and having short term goals, but these aren’t the norm and they aren’t representative. This article looks at two companies, Huawei and GPHL, and demonstrates a difference in approach to their goals that some western observers might find enlightening.
Huawei is a great example of a company with a fantastic trajectory from a small electronics organisation through to a world leader in its chosen fields. But if we look at the structure of the company, we find it’s incredibly different to the rest of the world’s company structures.
Guangzhou Pharmaceutical Holdings Limited (GPHL) is another great example of Chinese leadership in a field, this one is in Traditional Chinese Medicine (TCM). Again, a field that has the ability to make billions of dollars, especially in recent months with a pandemic hitting the world: These companies have proven track records of growth, their brands are either time-honoured, world renowned or both.
Yet, if we look at the revenue numbers they present to the world, we see something very strange and very unusual. Huawei, 858bn (over $120bn) and GPHL 133bn (about $19bn) RMB in 2019. Net profits of 67bn (7.8%) and 5bn (3.7%) respectively.
I don’t want this to be all about numbers so, let’s get some comparisons out of the way, before we discuss some very interesting reasons: Apple made $260bn with 37% gross profit; Amazon did even better with gross profit of $114.9bn on revenue of $280.5bn: let that sink in for a moment almost 41% gross profit
Neither of the Chinese companies are listed on the stock exchanges, neither of these companies have multibillionaire leaders — that’s not to say the leaders aren’t wealthy, as befits people who lead fortune 500 companies (and both of these are in Forbes lists) but they aren’t in the same wealth leagues as Bezos, Zuckerberg or Gates. According to Wikipedia, Ren Zheng Fei has a net worth of about $US1.3bn (less than 10bn RMB). Strangely low for a man who heads up the company that makes almost all the infrastructure for communications and has the world’s most popular brand of mobile phone.
So, is it bad management that leads two of China’s great companies into such “low” profit areas?
I’ve studied some business management over the years and I’ve even headed up large organisations with huge profit margins: YoY growth; double digit improvements; cost saving measures — these were annual catch cries at our meetings as investors sought more and more returns on their investment and managers looked for ways to boost profits, increasing both shareholder confidence and stock prices whilst also obtaining bonuses based on the above criteria being met. What I found when I looked at some of the companies in China and made enquiries into why they weren’t as profitable as their western counterparts didn’t really surprise me at all, but might surprise outside observers.
GPHL for example, has a policy of assisting with poverty alleviation. Let me give an example: Instead of just going to the countryside to find the products needed to extract the elements they require to manufacture traditional medicine, they source the products, meet with local farmers, discuss ways to enhance the living conditions of the farmers and then invest in infrastructure and development so that the farmers and locals can benefit from the supply of their produce to the major organisation that requires them. A recent, but by no means the only example took place in Guizhou, a poor province in Southwest China where many of the local people were still living on or around the poverty line. This area is famous for growing a type of rose (Roxborough Rose) and extracts of this are used in a refreshing, vitamin C laden drink called “Ciningji” produced by GPHL. GPHL, in conjunction with the local government and farming community have developed an entire industrial chain from plantation to processing, to production and marketing and even making sales with the profits shared between the company and the community. Not only does this system provide welcome jobs to the region, it provides a guaranteed market for their product and allows local residents to improve almost every aspect of their lifestyles through the additional jobs and income the plant processing and sales create.
GPHL helps by selling through its own network and allows the community to enhance sales through more creative and modern media such as live streaming and online sales. Celebrity endorsements, including the world-renowned Dr Zhong Nanshan and innovative marketing strategies such as alcohol-free mojito recipes have enhanced the brand’s popularity. Benefiting the company of course, but bringing much more benefit to the community. So, when I see that the company only has a 3.7% profit margin, I see a company that has a very different, long-term sustainable and equitable approach to its business practices.
Moving back to Huawei, why then is the owner of Huawei not as rich as the people who head up organisations like Microsoft and Apple? Well, according to the Harvard Business Review (https://hbr.org/2015/06/huaweis-culture-is-the-key-to-its-success) there are several reasons and all of them are good. First and foremost, the company is customer focused. So much so that the marketing team are an integral part of the Research and Development team. Whatever the marketing team suggests is looked at very closely by R&D as the focus is on the customer. This is more important than the development of the product for development’s sake. The owner Ren Zhengfei was also insistent that he would meet with any customer no matter how small but when bankers and capital investors visit, he allocates other department heads to meet with them, no matter how important they are (Morgan Stanley represented $3 Trillion of investment but Ren decided not to meet with them as they were not customers or potential customers).
Of almost equal importance in the eyes of the management team are the employees. Their working environment is one of the most comfortable in the world. Each employee is issued with a blanket and a mattress — now, here’s where western HR Managers jump up and down and talk about “slave labour” or “unhealthy working conditions” but what needs to be kept in mind is that Chinese workers are very much like Spanish workers. They arrive late to work quite often and they have 2 or 3-hour lunch breaks and then work quite late in the evening. The practice of sleeping at the desk is very common and is a carry on from school where all schools in China have a break in the middle of the day, usually from about 11:40am to 2:30pm before resuming. Then a canteen break about 6–7pm and further study in the evening. Not slave labour, just a different labour practice.
So, if Huawei is such a keen proponent of its employees, how else does it demonstrate this: by a very interesting ownership strategy: The employees actually own the company. Ren himself only owns 1.4% of the entire company, over 80,000 employees hold the rest. He shares the direction of the company with a rotating chairmanship and elevates people who are experienced in areas he is not.
Given that these two companies are leaders in their fields, it’s not surprising that many smaller, ambitious and even start-up companies look to them for leadership and what this brings to the Chinese business environment is a growing number of diverse companies that care more for their suppliers, their employees and their ongoing sustainability than they do for next quarter’s bottom line. Things that bode well for the future of long-term business in China
