If you have a subsidiary in China which is under-performing, do you like to know more about any probable way of transforming/restructuring it into a successful venture.

Reported in The Star (18/9/06) a ex-Malaysian banker, Datuk Teo Tong Kooi , CEO of Singapore’s Hong Leong Asia Ltd (HLA) apparently has managed to transform a formerly state owned refrigerator manufacturing plant into the second largest fridge maker in terms of capacity and sales volume in China. This plant is also HLA’s major income contributor.

Append below, the practical approaches where we can learned a little to root out the problems in such Chinese venture:

Let’s start with a little bit on the background:

The company is an ex-state owned company named Xinfei Electric Co Ltd. It is located in Central Chine’s Xingxiang city.

Existing procedures in late 2004 before restructuring exercises:

• There are no proper business procedures and organisation structure, let alone corporate governance. The company’s decision-making was centralised on a few ling dao (leaders). “There was no performance appraisal system. Staff promotions and recruitment were based on how close you were to the decision makers.There was no limit on expenses claimed. Everyone could claim as much as they liked.

Salient points on transforming it into a successful venture:

Beforehand, the overall correct approaches when investing in China:

• The needs to be hands-on hence the frequent traveling , especially in China as there is no way anyone could control its China investments from afar,
• Companies, which intended to invest in China, must have the best staff to lead the operations;
• There should be people who are senior enough to make wise decisions;
• They must have a high level of competency and can speak the language;
• It’s a mistake for some companies to post “under performers” to pioneer their operations in China as as to test water in this new market as the Chinese market is very competitive;
• People who fail should not be blaming the Chinese as big cheats or untrustworthy;
• It is very critical to hold controlling stake when investing in China as this will enable one to have a say in the day-to-day operations (incidentally, in September last year, HLA paid 425 million yuan to raise its stake in Xinfei to 90% from 51%.) and
• It is a necessity to have guangxi (relationship). Knowing the authorities would help to solve certain problems but guangxi does not denote bribery.

As to the details:

The first step is to form a proper operational foundation in Xinfei:

• by implementing the “growth sustainability plan” that practically covers all areas from production to sales and recruitment;
• instilled a corporate culture of accountability, discipline and ownership in Xinfei;
• seconded managers from HLA and the local senior staff to assist him;
• To garner the co-operation of the local staff, by patiently explaining to them the rationale and benefits of the changes;
• when dealing with the local managers in China, there is the need to persevere;
• Don’t find fault with their wrongdoing. They will be cooperative to adapt to the new changes. Otherwise, they could backfire your plans;

The subsequent step is :

• to focus on research and development;
• brand building;
• human capital management and
• putting up a growth accretion plan in place to boost market share and sales.

Aftermath of the restructuring:

• Despite China’s highly competitive market, Xinfei’s earnings are on the rise.For the last financial year ended Dec 31, sales volume expanded to 2.8 million units from 2.4 million in the previous year ( after undergoing two transformation plan);
• Sales revenue grew to 3.6bil yuan (RM1.67bil) in the last financial year from 2.9bil yuan (RM1.35bil), while profit after tax increased to 104mil yuan (RM48mil) versus 92mil yuan (RM42mil) in the previous year.

Moving forward:

Operating conditions in China’s home appliance industry are getting tougher. Besides the entrance of foreign brands intensifying competition, there is an increasing threat of dominant electrical appliance retailers also trying to squeeze the manufacturers’ profit margin.

According to Mr Teo, it is a survival of the fittest and is confident that Xinfei will continue to do well. Teo, also sees huge potential in consumer-oriented businesses in this populous nation.

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