Chinese Models

House in the country

Will Country Garden’s focus on smaller cities (and Malaysia) pay off?

Yang-Huiyan-w

Yang Guoqiang: helping his daughter to overtake Jack Ma in wealth stakes

For most of its existence, US retail giant Walmart was lauded for its low prices, astonishing logistical abilities and frugal corporate culture. While its success has long been a case study for MBA students, Yang Guoqiang (Yeung Kwok-keung in Cantonese) is another admirer of the retail behemoth.

In fact, the founder of Country Garden forged a strategy to transform the property developer into the “the Walmart of real estate”. To that end, the Guangdong-based firm has chosen to compete in third- and fourth-tier cities, where land is cheaper and competition less cutthroat. The strategy: to roll out large numbers of housing projects quickly and cost-effectively.

That business model has paid off. In just seven years, the company has grown over tenfold from Rmb43 billion to Rmb550.8 billion ($83 billion) in annual contracted sales. Last year, the developer reported a 106% increase in core net profit, reaching Rmb24.7 billion.

Late last month the developer successfully spun off Country Garden Services, its property management division, on the Hong Kong Stock Exchange. Caijing magazine reckons that the listing will add another $2.2 billion to the wealth of Yang’s daughter Yang Huiyan, who is also the controlling shareholder of Country Garden after her father transferred all his shares to her back in 2007 (although market watchers believe Yang senior is still the one running the show).

There’s even talk that by the end of 2018, the 36 year-old, already China’s richest woman, could surpass Jack Ma as the third richest person in the country (behind Tencent’s Pony Ma and Evergrande’s Xu Jiayin). As of 2017, Yang Huiyan was believed to be worth Rmb149 billion.

What differentiates Country Garden from other developers?

Unlike rivals Evergrande and Wanda, Country Garden rarely dabbles outside real estate. Even within the property sector, the developer has largely stuck to projects in lower-tier cities, which account for about 58% of its contracted sales.

In fact, the company has insisted on a so-called “blanketing strategy”, which requires its management to try to secure a Country Garden project in over 300 Chinese cities.

“The most unusual thing is that in the past 20 years, Country Garden has focused on the property market in third- and fourth-tier cities. Even though it hired Zhu Rongbin [its former president] to spearhead its business in first-tier cities, it is generally more talk and little action,” says Pencil News, a portal. “The reason is because Yang [Guoqiang] realises the business model of quick turnover works best in lower-tier cities.”

By keeping costs considerably lower than in more developed markets, Country Garden has also kept the housing projects more modestly priced to appeal to lower-income, more rural homeowners.

“Country Garden makes homes that aren’t anything fancy but a big enough upgrade from an existing neighbourhood so homebuyers still think that they are trading up,” says Sohu, a portal. “Yang understood very early on that he wouldn’t be able to charge a lot for the houses in less-developed cities so his motto is standardise the developments to achieve economies of scale. Just like Walmart: increase volume to make up for low margin.”

Chairman Yang’s business philosophy

Yang’s rag-to-riches story is a well-told one in China. He has long been known for his obsession with speedy execution: the farmer-turned-developer pushes his team to complete the design of a project within three months of the land being bought.

In fact, it has become a running joke within the industry that a Country Garden project is usually available for sale within four months after the land is first purchased; by the fifth month, the developer is already cashing the cheques from homebuyers; and within six months, cashflows from the project are used to finance a new development.

“These kinds of extreme efficiency are the reason other real estate developers can’t catch up with Country Garden no matter how hard they try – because no one has Yang’s confidence, and certainly no one has his stubborn insistence,” says Pencil News.

“Quick turnover means capital can be recycled faster, helping keep financing costs low,” observes the Hong Kong Economic Journal. “It also means a developer does not need to take excessive risk from sitting on too big a land bank; this is particularly crucial for a developer to weather market downturns.”

Yang’s management style

Like other successful entrepreneurs, the 63 year-old is gripped by the fear of corporate decline.

“Life is not fair – get used to it. The world doesn’t care about your self-esteem. The world will expect you to accomplish something before you feel good about yourself.” This quote from Bill Gates adorns the lift lobbies of every floor at the the developer’s headquarters, and sums up Yang’s management style – namely, blunt and results-driven.

According to industry insiders, Yang employs mass-sackings in anydepartment guilty of serious oversights that see a project run behind schedule. One manager claimed that he’d lost 15kg in weight in a single year after working at Country Garden – owing to the stress.

But the pay-off can be worth it. On top of having little tolerance for mistakes, Yang is also known for valuing talent. In 2016, he is said to have surprised one senior manager with an Rmb80 million bonus after he beat a big sales target (the stunned staffer went up to the chairman to ask if he had mistakenly added one more zero to the cheque).

“While Yang may not be the most educated manager, he certainly understands human nature: using money to align personal interest with the corporate goal. He is the first to offer such a large bonus in the property industry so that every employee in the company stays focused on sales, costs, profits and turnover. So everyone can make huge financial returns when a project is successful,” says Pencil News.

Since 2010, Country Garden has been on a hiring spree at the senior level, focusing mainly on candidates with master’s and doctoral degrees. Yang also dispelled any worries that he is planning to run the company like a family business by personally spearheading a mentorship programme to help the best talent advance within the organisation.

“For Country Garden, the huge leap forward in the past six years has been the enormous contributions of the team of senior managers… Country Garden has hired more than 1,400 professional managers to run the company. These people have made a real impact on the company that is going at the speed of a race car,” says Yin Xia Media, a financial blog.

Challenges ahead

Country Garden lacks a meaningful presence in major cities where its rivals have amassed large land banks over the years.

“With land prices rising in first- and second-tier cities, every developer is pursuing profit margin. On the other hand, land is abundant in lower tier cities and prices don’t usually move in five years, so Country Garden can only aim for quick turnover and small profits,” says Sohu. “It’s like you can’t compare the profit margin of Walmart with Apple.”

Market observers also question whether Country Garden’s focus on third- to fifth-tier cities is sustainable, while it will be hard for the developer to shrug off a brand image of mainly serving the lower-end market. ThePaper.cn also reported this week that Country Garden has been under pressure to abandon its “blanketing strategy” because of cashflow concerns.

A bigger problem could be brewing in Malaysia, where Country Garden has been developing a mega residential project called Forest City. This appears to have drawn the attention of ­Mahathir Mohamad. During an interview with South China Morning Post last month, the Malaysian prime minister singled out Forest City as a housing project that is “beyond the reach of most Malaysians”.

But then again, don’t bet against Yang. “I was a farmer who came with nothing. The poverty I experienced before I turned 25 was inconceivable: I never owned a pair of shoes or wore socks until I was 18. When I was 23, the patches on my clothes had completely obscured the original cloth-ing. My sister ­­– she starved to death during the Japanese invasion when she was 3,” the tycoon once recounted.


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