China ConsumerJuly 5, 2013

The winner takes it all

Zong Qinghou is China’s richest man and its archetypal business tycoon

Few would turn down a dinner invitation from Her Britannic Majesty. Unless, perhaps, you can lay claim to a title of your own as China’s richest man.

One man who did just that, Wahaha’s chairman Zong Qinghou, has said that he declined the invite from the Queen to attend a February event celebrating the anniversary of her accession to the throne. How about dining out with British Prime Minister David Cameron a few days later? Sorry, Zong had no time for Downing Street too.

“Flying more than 10 hours, have a dinner, and then come back? It isn’t worth it,” Zong told the China Entrepreneur magazine in an interview.

Time is a luxury that Zong can’t really afford. The 68 year-old spent 15 of his prime years in the countryside during the Cultural Revolution. He worked as a school teacher until he turned 42. Only then did he start his own business, growing Wahaha into the third largest beverage firm by sales in China.

Chain-smoking Zong’s schedule is a little more flexible when it comes to networking with Communist Party officials. Like many of China’s leading firms, Wahaha has a Communist Party committee inside the company. And for 11 consecutive years, Zong has attended the country’s annual parliamentary session as a delegate. This year in March, after turning down Buckingham Palace, Zong again spent a fortnight in the Great Hall of the People. And as usual, he was keen to get his voice heard, even as many other delegates were nodding off in boredom. Zong raised an objection to the distinction drawn between state-owned and private firms. Why not view them all as Chinese firms, he asked? “All enterprises founded by Chinese citizens are effectively enterprises of our nation,” Zong suggested, adding that current definitions have grown outdated, dampening the development of the market economy.

Zong’s motivation for making such a remark? Presumably he was calling attention to the need for fairer treatment, hoping for similar deals on the bank loans or government subsidies that seem to be made more available to SOEs. But perhaps inadvertently he had also stumbled on a more profound point: the difficulty of distinguishing between what is state-controlled and privately-owned in China. The Bloomberg Billionaires Index renamed Zong as China’s richest man last September, for instance, after learning that his stake in the company was “more than double previous estimates”. According to earlier disclosures, Zong’s shareholding in Wahaha was only 29%. But Bloomberg had to redo its calculations after being told by a Wahaha spokesman that Zong actually owns an 80% stake. That made his net worth $21.6 billion, or $13.4 billion more than Robin Li, the founder of popular search engine Baidu.

What had changed? Nothing really. The truth is that there are two Wahaha groups that we are talking about. Both operate under the same brand name (and neither is listed). One is closely held by Zong, the other has origins as a state firm. He holds stock in both.

This story brings us back to 1987 when Zong first began in business: selling children’s health drinks at schools in the Shangcheng district of Hangzhou. The venture was named Wahaha, supposedly to recreate the sound of a laughing child. At this time every enterprise was technically a state firm and in Wahaha’s case, it was 100%-owned by a holding company of the Shangcheng government, which is now known as the Shangcheng Investment Group. Thanks to incentives and subsidies – and Zong’s entrepreneurial skills too, of course – Wahaha expanded quickly. By 2001, when private ownership was no longer an ideological albatross, Shangcheng Investment had transferred a 29.4% stake in Wahaha to Zong, and 24.6% to Wahaha staff.

By then, Wahaha had attracted investment from Danone too. Starting in 1996, and through a series of further joint ventures with the French food giant, Wahaha grew to 39 businesses, earning billions in bottled water and fruit juice sales. But the partnership turned sour in 2007 and would eventually be dissolved (see WiC39).

One of Danone’s main gripes: it alleged Zong was operating parallel firms that directly competed with their JV. These, it argued, were selling products practically identical to those in the Danone-Wahaha deal. Zong countered that there was nothing blocking this in the original agreement, throwing in for good measure that the Danone JV had no claim on the Wahaha trademark either.

Zong played the nationalist card too. He told Sina.com “the Chinese have stood up and the era of invasions by foreign armies is long gone”. It worked. In what amounted to a lucrative victory Zong bought back Danone’s stake for $450 million in 2009. Forbes named him China’s richest man a year later.

Controversies aside, a simpler explanation of how Zong got so wealthy is that he picked the right industry and did so long before his domestic competitors. He anticipated changes in consumer tastes and rising disposable incomes. Now a policy push to skew more of the Chinese economy towards domestic consumption should benefit Wahaha in future too (today it classes Coca-Cola as its main rival, as well as Tingyi of Taiwan).

Others say Zong is the definitive Chinese-style tycoon. Such types grew up in chaotic, fast-changing business environments in which rules and regulations were treated ‘pragmatically.’ The abiding philosophy was often one of ‘he who dares wins’ although some went too far: GOME’s Huang Guangyu, for one, who has topped various tycoon rankings in the past but is now in jail. To get the balance right, the wiliest tycoons cultivate government ties furiously. According to Hurun, 83 billionaires attended this year’s legislative session in Beijing as delegates, Zong amongst them. Some have even been admitted to the inner core of the ruling Party. Liang Wengen, chairman of heavy machinery maker Sany, was one of the privileged few to elect the seven-man Standing Committee at the 18th National Party Congress last November. (Liang was named as China’s richest man in 2011 .)

Zong told the delegates this year that when entrepreneurs emigrate with their money – a trend we pointed out in WiC185 – they are “the biggest loss of state-owned assets”. To set a patriotic example he has given up his own US residency rights (although seems less keen to explain why he wanted them in the first place). But many less well-connected Chinese businesspeople aren’t following Zong’s example, taking the opposite route in buying assets overseas and, in some cases, moving there.

Private sector bosses have also complained about the guojinmintui trend of the past five years. The term means the ‘state advances as the private sector recedes’ and refers to a process in which state-owned enterprises have increased their presence thanks to access to cheap bank loans and via windfalls from lucrative contracts generated by the gargantuan 2008 stimulus plan. The wider suspicion is that the families of top government officials enjoy shadowy control over these SOEs and have been beneficiaries of spectacular financial gains. When political analysts talk vaguely about ‘vested interests’ acting against free market reforms, these are usually the kind of forces that they mean.

Since taking the premiership Li Keqiang – an economist by training – has indicated that he favours changing course and doing more to promote the private sector (see WiC195). That would be in keeping with Zong’s call for a more business-friendly environment for entrepreneurs. But a China where tycoons succeed without political capital seems a distant prospect. Indeed, the Daily Telegraph reckons one reason that Zong made so much of turning down his dining invitations in London was that it did his reputation no harm in Beijing (especially as the British government was in the bad books after row over Tibet). Indeed, the newspaper questions whether Zong ever really snubbed Britain’s Queen, pointing out that the dinner is mysteriously absent from the court circular.

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