China’s private firms: When a hug becomes a squeeze
Like any other morning, a line of children streams down a school bus outside a school in downtown Shanghai, each of them armed with a backpack and, noticeably, a green-coloured packet of orange juice – the Huiyuan Juice kind of green.
China Huiyuan Juice Group is a ubiquitous presence in China. As the largest privately-owned juice producer in the country, its products dominate supermarket shelves and its ads swarm local television and radio.
It is a domestic corporate giant through and through, or what is known as a “local champion”.
But here’s the thing: it could have been much bigger, with fizz. In 2008, Coca-Cola came knocking, roses in hand as it placed a US$2.4 billion proposition on the table: it wanted to acquire Huiyuan Juice.
The deal would be the largest foreign buyout of a Chinese company in history, and a match made in corporate heaven, giving Coca-Cola access to a massive and elusive market, and Huiyuan fresh funds and international expertise.
But just as the American conglomerate leaned in for a kiss, in barged China’s Ministry of Commerce for the dramatic rebuff. The fruit was there to be juiced – a deal which would have netted founder Zhu Xinli billions of dollars – but Coca-Cola was squeezed out instead, due to monopoly fears.
It was downhill from there for Huiyuan, which has been struggling with mismanagement, rising competition, and shrinking sales.
The firm is now facing a January 31 deadline to resolve billions’ worth of debts. Failing to do so means it would be delisted from the Hong Kong Stock Exchange, and possibly cease to exist.
How did China’s local champion even get to this stage?
When protectionism stifles POE-tential
Privately-owned enterprises (POEs) have long existed uncomfortably alongside a government with extensive reach as they are often subject to party intervention for “national interests”.
And while China’s leadership is known for being swift and decisive, one area it hasn’t been able to land firmly on is what it wants to do with POEs.
The state has flip-flopped on related policies (国进民退,民进国退) since the 1990s, scaling back on state-owned enterprises (SOEs) and promoting POEs at one point, and doing the reverse at another. Today, under President Xi Jinping, the focus has reverted to state-driven growth.
What now?
Many POEs are in trouble. Rating agency Fitch recently said China’s private companies have defaulted on bond payments at a record rate in 2019, and could face similar pressures this year.
In a separate article, Yang Wenlong, chairman of pharmaceutical company Renhe Group, said private companies are seen by banks as less reliable than SOEs in repaying their debts. His attempt to buy another pharma firm failed because the local government decided to allow an SOE take over the business instead.
“The collapse of many private companies is due to a lack of capital,” he said, alluding to how private companies in China have resorted to a shadowy world of wealth products to stay afloat after being denied financing from mainstream banks.
Huiyuan Juice is among those struggling, badly. Zhu was denied the professional expertise and funding he really needed at the time of the buyout.
He ended up roping in his own family members, who did not have the requisite experience, to fill the top executive posts. It was a bad move. The numbers showed for it: profits slumped from 233 million yuan in 2009 to 13 million yuan in 2016, while total liabilities surged from 2.3 billion yuan to almost 10 billion yuan.
Seen another way, the buyout could have ushered in the opportunity for China to elevate its private sector to the next level. It was a chance to bring world-class management practices and top executives not just into Huiyuan, but also China’s wider corporate landscape.
The importance of POEs cannot be overstated. SOEs drive 70 per cent of the economy, but POEs employ most of the people in urban areas – a staggering 80 per cent.
Adding to that, unlike SOEs, which are insulated from market competition, POEs are forced to stay on their toes, innovate, and improve all the time. Some of China’s most influential companies – Huawei, Tencent, Alibaba – are privately owned, and they have been critical in driving innovation in the Chinese economy as well as the world.
Perhaps the best way to support POEs is to allow more leeway for market forces to come into play. It may mean losing dollars to the foreigner, but this could be a worthwhile trade-off if means learning from the best in the industry. A form of school fees, perhaps?
Come the Year of the Rat, hopefully the Chinese economy can stay quick and nimble – with the help of its POEs.