Date
23 October 2017

Corporate China runs on two-legged walk

Focusing on a core business may be a time-tested formula for success in many parts of the world but in China many entrepreneurs believe that betting everything on one venture is risky. They prefer to “walk with two legs”, a phrase often cited to justify a highly diverse investment approach.

In some cases, companies walk with three, five or more legs, making them the corporate equivalents of millipedes.

One corporate titan laid out the logic of the approach on China Business Network’s Managing China show. When asked why the firm decided to get into pharmaceuticals and mobile phone parts at the same time a few years ago when it had just 900 million yuan (US$146.75 million) at most, he said he was bullish on both markets but afraid to pick just one in case it turned out to be the wrong call and the company lost everything.

Instead, he split the money into two piles, even though that could mean falling short of funds on both battlefields. It’s paid off so far but others have not been so lucky.

This week, Chongqing Brewery (600132.CN) announced that its hepatitis B vaccine venture didn’t work out as hoped, hinting that the end could be nigh for the multi-year misadventure.

Beer and vaccine are an odd combination but, going on the walking-on-two-legs principle, it makes perfect sense to diversify risk and pair unrelated businesses — at least at the start. Alas, Chongqing Brewery’s shares plunged after it said late last year that trials indicated that its vaccine was ineffective. It could have been much harder and a lot more expensive for Carlsberg to raise its stake in the brewer this month if things had gone the other way.

Then there is Yurun Group, a conglomerate best known as the mainland’s biggest meat processor but with interests in logistics, department stores, tourism, real estate finance and others through more than 300 subsidiaries. After being embroiled in a meat quality scandal, and hit by reports of dubious financial arrangements in channeling funds from Yurun Food (01068.HK) to support other group entities, its tarnished core business never quite regained its previous vigor. The listed flagship sank into loss last year and barely broke even in the first half of 2013.

Shampoo maker Bawang (01338.HK) decided to make another liquid product a few years back: herbal tea. The board decided to close the operation down from July.

Of course, not all diversification ends in disaster. Fosun International (00656.HK), for instance, has blossomed into a conglomerate active in insurance, mining, pharmaceuticals, steel and asset management.

– Contact the writer at [email protected]

SK

 

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