Chinese Character

Trouble in store

The rise and fall of China’s richest man

Trouble in store

Regrets, I have a few: billionaire Huang Guangyu reflects

Naming is a true art. The Chinese believe the name of a child will set his or her fate, and commonly opt to change their names later in life, hoping to improve their destiny.

For Huang Guangyu, who was born Huang Junlie, he got some of it right. He achieved ‘abundance’ (yu) very quickly and has a ‘fiery’ (lie) character. But now he looks likely to lose his ‘brightness’ (guang) – in a dark jail cell.

Huang’s is a classic example of the rags-to-riches tale – not uncommon in today’s China. Born in 1969 into a poor family of six in Shantou City – one of the ports in Guangdong province to host foreign ships after the Opium War – he used to pick scraps and rubbish as a boy and dropped out of school at 16.

Huang was determined to achieve greater things, so much so that just a year later, in 1986, he opened his first stall in Beijing with his elder brother, first selling clothes but soon turning to electronics.

The following year the Huang brothers launched their first store under the name Gome, which literally means ‘national beauty’.

They adopted the time-honoured mass retailing strategy of selling in bulk at low margins – expanding fast and building up economies of scale. The younger Huang soon won a reputation as the ‘Price Butcher’ and Gome as ‘China’s Best Buy’.

The tycoon’s assertive business style was apparent from his early days. It is said that Huang liked to ask candidates applying for senior management positions whether they believed it was possible to sell watermelons and cosmetics at the same time. Those who said it wasn’t achievable didn’t get the job.

“There are no products that won’t sell, only people who don’t know how to sell,” Huang claimed.

In 1999, he opened his first Gome store outside Beijing, setting off an expansion that soon made the retail chain one of the top 100 companies in China.

By the time Gome listed on the Hong Kong stock exchange in 2004, the company was the leading electronics retailer in China with nearly 100 stores in 22 cities. That same year Huang topped Hurun’s China Rich List for the first time, then again the following year and again in 2008, with wealth valued at $6.3 billion.

“The truest wisdom is a resolute determination,” Napoleon once said.

True enough. Huang remarked: “Once I set the direction, get a fair idea of what I want to do, and a 30% confidence in the undertaking, I’ll take it on, and go for it at full speed… I don’t sit around for another three months until the plan is drafted with perfect punctuation marks.”

But resolute determination applied to the wrong choices (in this case, the capital markets) can lead to tragedy. Especially when rules are ignored and laws broken. Even Napoleon ended his life in exile, after all, imprisoned on a remote island.

In July 2006, Huang and his elder brother Huang Junqin were investigated by the police for illegal receipt of loans more than a decade earlier. They were cleared of wrongdoing in early 2007. But the authorities wouldn’t stay away for long.

Last November, Huang went missing. As news broke that he was under investigation by the Beijing authorities for ‘suspected economic crimes,’ the Hong Kong stock exchange suspended trading of Gome’s shares.

The CSRC then announced it had found that a company controlled by Huang was involved in irregular asset restructuring and swaps in Shanghai-listed Sanlian Commercial and Shenzhen-listed Beijing Centergate Technologies – both companies controlled by his brother.

Prior to the probe, the elder Huang had announced that the two companies would inject assets worth Rmb22 billion ($3.2 billion) into Shandong Jintai, a listed drug company he also controlled, sending the latter’s share price soaring by almost 450%.

As rumours on the progress of Huang’s investigation continued to spread, the scope of the probe widened to include government officials like a Shenzhen mayor and officials from Ministry of Public Security’s economic investigation bureau.

Meanwhile, Huang Guangyu was detained by the Chinese authorities.

During his almost year-long detention he has remained firmly in the public eye and Beijing-based newspapers last week reported that he is likely to be charged with insider trading – a crime which carries a jail sentence of five to 10 years.

It may not be that cut and dried. According to Legal Evening News, the court has (twice) sent the case back to the police due to ‘insufficient evidence’. But Huang may not be that hopeful; he is reported to have made a failed suicide attempt.

Regardless of the final outcome, Huang is the latest example of how some of China’s business elite is still grappling with the need to respect rules that make a market economy efficient and transparent.

Gu Chujun, once head of a leading appliance company, was convicted of falsifying corporate reports and sentenced to a 12-year prison term. Zhou Zhengyi, a Shanghai-based real estate developer, was arrested in 2003 on corruption charges. He served three years in prison, and was then sentenced to an additional 16-year term for bribery and fraud. Both Gu and Zhou had at different times made the Rich List.

Arguably, the likes of Huang are no different from the early US ‘robber barons’ – many of whose 19th century fortunes were built with more than a hat tip to unethical and even illegal practices.

Even in recent times, names such as Jeffrey Skilling of Enron and Bernard Madoff remind us that corporate fraud and insider dealing are hardly unique to China.

But what of Huang’s company and the empire he built?

Since his arrest, he’s relinquished his title as chairman of Gome, though he remains the largest shareholder of the company with a 35% stake.

Desperate to restore confidence in the company, Gome’s new management assured investors it still has the backing of major suppliers, and brought in Bain Capital in August this year as a strategic shareholder through a $418 million deal. It also hired Ernst & Young to evaluate the company’s internal controls, and won a positive assessment.

Gome may still thrive, even without its hard-driving 40 year-old founder.

But the rise and fall of China’s (formerly) richest man has ramifications that reach far beyond the company’s P&L.

As WiC has stated before, a famed Chinese strategy is to ‘kill the chicken to scare the monkeys’. China’s tycoons know that the authorities are sending them a message: play by the rules or you could be next.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.