Disagreeing with Dong

With Midea taking over the German robot maker Kuka and GE Appliances now a unit of Haier, China’s white goods firms have become a major force in the country’s global M&A spree.

About 10 years ago the most acquisitive firm in the sector was Greencool. It was founded in 1992 by Gu Chujun, when he patented a freezing agent for fridges and air-conditioners. In 2001 Greencool took over Guangdong Kelon, then the leading refrigerator maker (and based in Shunde, where Midea is also headquartered) plus several of its rivals in other provinces. Gu was viewed as something of a corporate wunderkind and the scientist-turned entrepreneur also ventured into the auto industry with the acquisition of three carmakers. But Greencool’s expansion pitted the Jiangsu native against businesses owned by local governments. Rivals accused him of embezzling state-owned assets and his private-sector empire unravelled. He was detained in 2005 and later sentenced to 10 years in jail for crimes including falsifying his accounts.

Kelon then became a takeover target once more. In 2006 it was purchased by Hisense. After early release in 2012 Gu insisted that he was an innocent victim of the guojinmintui trend (‘the state advances, the private sector recedes’) and he filed lawsuits against several firms including Hisense, seeking Rmb48.9 billion ($7.1 billion) in compensation. The claim was rejected.

Gu’s case is worth recalling at a time in which another business leader in Guangdong’s white goods sector has been embroiled in a power struggle with the local government. The Zhuhai authorities – shareholders in Gree Group – said this month that they had decided to remove the company’s chairwoman Dong Mingzhu from the top post, although she will stay on as boss of the state firm’s listed unit, Gree Electric. Dong’s demotion follows a major falling out with the Zhuhai government over Gree Electric’s planned expansion into electric vehicles. Onlookers now wonder what’s next for the air-conditioning giant.

Who is Dong Mingzhu?

The 62 year-old has a reputation as one of the toughest businesswomen in China. Born in Jiangsu, Dong was working as a junior government official in Nanjing when her husband died. In 1990 she quit her job and took her eight year-old son to Zhuhai where she joined Gree as a salesperson. Gree was then a struggling maker of air-conditioners and the inexperienced Dong was sent to some of the least-promising sales territories. But the single mother always came back with big orders and by 1992 she was responsible for one eighth of Gree’s sales.

Dong was promoted to head of sales in 1994, with Gree still in poor shape. It faced fierce competition from other air-con makers, and many of its senior executives were jumping ship to more diversified rivals. Gree lacked resources. At one point, according to China Business Journal, Dong and a group of 20 salespeople had to face the 1,000-strong sales force at then-market-leader Chunlan Air-Con, which was based in Jiangsu.

Dong was credited with instilling fighting spirit at the Zhuhai-based firm. With hard work and a more disciplined focus, Gree prospered, growing into the undisputed leader in the air-con business, and today occupies nearly 40% of the industry’s market share.

(Chunlan has almost dwindled into insignificance).

Dong was promoted to become chairwoman of Gree Electric in 2007 and five years later she became the head of the parent group as well.

What’s special about her removal?

As of this week Shenzhen-listed Gree Electric was reporting a market value close to Rmb150 billion (that compares with Midea’s Rmb180 billion). Sitting on a cash pile of nearly Rmb100 billion, Gree is well resourced for a series of M&A deals. But Dong is unusual in her industry. Some of her rival bosses have become billionaires. The founder of Midea, He Xiangjian, for one, now sits on a controlling stake in Midea and CBN estimates that He is worth Rmb65 billion. Meanwhile, Zhang Ruimin, the chief executive at Haier, has attained political prominence as a member of the Party’s high-powered Central Committee. Politically, Dong isn’t even a Party member. Business-wise, she has taken on the role of a professional manager. Her holding in Gree Electric is relatively small at 0.74% – versus an 18% stake held by Gree Group, the state parent under the Zhuhai government.

That’s meant Dong’s control over Gree has proven more vulnerable, despite her contribution to the company’s growth. Tellingly, a notice from the Zhuhai branch of Sasac, the agency that manages state-owned assets, was the method used to demote her from the top job at Gree Group. Onlookers are wondering if this is undeserved treatment for a loyal and outstanding servant, Southern Metropolis Daily notes. But the bigger question is whether Dong’s chairmanship of Gree Electric is also under threat.

What triggered the move?

Competition among the leading white goods makers has intensified and all the leading firms are positioning themselves to respond to the State Council’s call for the development of ‘powerful Chinese brands’ and the ‘upgrading of the country’s manufacturing sector’. That’s one of the reasons why Midea’s buyout offer for Kuka and Haier’s takeover of General Electric’s white goods unit has had such strong support (see WiC339).

Dong has been telling her shareholders that it is almost impossible for Gree Electric to squeeze out higher profit margins or grab much more market share from its air-con core business. Thus she wants to take the company in new directions, and Gree has been diversifying into making smartphones and, more recently, electric vehicles (EVs).

However, the plan to start making EVs has seen Dong run into opposition from other shareholders – most notably, the Zhuhai government. In March this year Gree unveiled a Rmb13 billion deal to take over the Zhuhai-based electric vehicle maker Yinlong, as well as its New York-listed battery producer Altair. The bid was part of Dong’s plan for a strategic overhaul. Demand for air conditioners has softened, leading sales to plummet 30% last year. But the proposal was blocked by shareholders. The setback left Dong furious, and she berated investors at the company’s annual meeting (see WiC345).

Opponents of the deal have been briefing the press that they want Gree to refocus on its core business, and boost profits there. Some shareholders were concerned that Gree was overpaying for an unproven carmaker (coughing up nearly 30 times Yinlong’s earnings). And according to CBN, the Zhuhai government – which controls almost a fifth of Gree Electric via Gree Group – was the most cautious about how the deal would be financed: via a Rm10 billion placement in Gree stock.

Also potentially an issue: Dong was proposing to chip in Rmb1 billion personally in the placement. If approved, her stake would be nearly doubled to 1.3%.

A week after the initial proposals for the Yinlong bid were vetoed, Dong was relieved of her role as chairwoman of Gree Group and the takeover plan was scrapped.

Is Dong too outspoken for her own good?

The news of Dong’s demotion, first announced on November 11, was deemed shocking enough it even drew media attention away from e-commerce giant Alibaba’s Singles’ Day event on the same day.

“She is an internet celebrity in her own right,” Beijing Youth Daily commented. “Now she has morphed from the queen of sales into the queen of news headlines.”

In fact Dong has been increasingly high-profile since taking over as the boss of Gree Group in 2012. For instance, in late 2014, she made headlines for trading barbs with Xiaomi’s chairman Lei Jun over their respective business models, including a widely-discussed Rmb1 billion bet about whether Xiaomi’s sales would overtake Gree’s within five years (see WiC266).

Indeed, Dong is such a magnet for publicity that she even decided to dispense with Jackie Chan as a company ambassador. That had nothing to do with the so-called ‘Jackie Chan curse’ (see this issue) but more because Dong concluded she could do a better job. “Spending Rmb10 million [a year] on Jackie Chan is too expensive. It won’t cost a single penny if I do it myself,” she said. These were calculated moves but not just for marketing purposes, Beijing Youth Daily reckons. Another outcome was that the public has the perception that Dong and Gree are indivisible.

As she put it herself: “There would be no Gree without Dong Mingzhu; and there would be no Dong Mingzhu without Gree.”

A boardroom struggle?

Gree Electric’s management has a history of feuding with its state-backed parent. In 2005, Gree Group sparked the so-called “battle of father and son” when it proposed to develop new product lines such as rice cookers and microwaves under the Gree brand. Ironically in light of this month’s row, Dong and her long-time mentor Zhu Jianghong, who was chairman of Gree Electric, opposed the diversification plan because they feared it would distract from the group’s core air-con business. Eventually the Zhuhai government conceded and the battle ended with Zhu becoming Party boss and chairman of Gree Group.

Relations at the top were unsettled again in 2012 following Zhu’s retirement. According to Beijing Youth Daily, the Zhuhai government “parachuted” Zhou Shaoqiang, a government official with no affiliation with the company, into the key role as Party boss of Gree Group. Zhou was nominated as a director of Gree Electric as well but the appointment was blocked by other shareholders such as the Yale Endowment (see WiC154).

The bickering was overshadowed when Zhou became one of the first officials to be disgraced by Chinese President Xi Jinping’s austerity campaign. Zhou was photographed at an extravagant dinner in close proximity to 12 bottles of expensive wine. He was removed as the chairman of Gree Group and succeeded by Dong.

Another Vanke saga is ahead?

The removal of Dong from Gree Group’s top post suggests that the Zhuhai government is trying again to have a bigger say. It may have good reason for feeling insecure. With a structure similar to Shenzhen-based property developer Vanke, Gree Electric’s shareholding is fragmented, leaving it more open to outside challenge.

The respected market commentator Pi Haizhou believes a boardroom struggle like the Vanke saga (see WiC308) is possible and he says that other shareholders are worried about the potential for instability if Dong is forced out completely. “Investors will worry that Gree Electric could become another Vanke if Dong is also sacked from her post in the listed firm,” he writes in his blog.

Could a disgruntled Dong quit on her own accord, and then head a hostile takeover bid? The confrontation would be a fiery one, and Sina Finance says that other firms are rethinking the relationships between state shareholders and their professional managers, such as Dong and Vanke’s Wang Shi.

“Compared with the jailed Gu Chujun, Dong Mingzhu and Wang Shi are much luckier. At least they are likely to have a very respectful ending. After all the years of hard work they have enough wealth and connections. They can enjoy a well-off lifestyle, they can preach their management philosophy among fellow entrepreneurs and they will stay in the media limelight,” Sina observes. “But their ending [losing control of the firm that they helped develop] is a sad one for Chinese companies. This is a tragedy for the many Dong Mingzhus as well.”

 

Keeping track: Tax cuts just before an election are a typical tactic for a government wanting to stay in office. And Dong Mingzhu, the long-serving chairwoman of Gree Electric, seems to have resorted to similar incentives in the power struggle at China’s leading air-con maker. What is Dong’s carrot? Starting in December, all of Gree’s 70,000 or so employees – if they have worked at the Zhuhai-based company for more than three months – will get a Rmb1,000 ($145) a month pay rise. Gree will have to spend an extra Rmb850 million each year to cover the increase, an amount equivalent to 6.8% of its 2015 net profit. The move came just days after Dong was removed as the boss of Gree Electric’s unlisted parent firm Gree Group, which is owned by the Zhuhai government and controls about 18% in Gree Electric. Dong owns no more than a 1% stake in Gree Electric herself. The salary raise is likely to endear Dong to her employees, especially her junior staff, whose average income is below Rmb100,000 a year. There is speculation that the Shenzhen-listed firm could become embroiled in a takeover tussle or even a management buyout. But it’s employees are likely to remember the Christmas gift from Dong this year.

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