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Capital dearth prompts new strategies

By Hong Liang (China Daily)
Updated: 2009-02-17 07:51

There was a time not too long ago when capital was for the taking from a boiling stock market and credit was easily available at negative real interest rates. Banks and corporations in almost every sector were raking in huge profits and expanding at a breakneck pace with little regard for earnings quality.

Listening to the often boastful comments of Chinese corporate chieftains on the many television talk shows and Internet chat rooms, one would most certainly get the impression that corporations in China existed for the bragging rights that come with being No 1 in their respective fields. Asset size and market share were the main criteria often cited by stock analysts and self-styled investment gurus in recommending so-called market hot picks. And, of course, they were seldom wrong when share prices had only one way to go - up.

As we all knew, the economic bonanza lasting more than two years from 2006 to late 2008 was underscored by the rapid growth in exports to the United States and Europe, where the demand for Chinese-made goods seemed insatiable. Although the government had made a valiant effort to rein in credit expansion and excessive investments, the asset bubble kept ballooning.

Some economists and management experts have contended that corporate expansion policy was dictated not so much by the personal whim of the chief executives, but by the business environment that tended to favor companies, especially those in the retail sector, which had the largest share of the market. The smaller companies, particularly the more profitable ones, were either taken over, or threatened to be gobbled up, by the bigger predators, whose growth could only be maintained through acquisitions.

The stock market crash in 2008 abruptly changed the rule of the Chinese corporate game. Long before the slide began in late 2007, some economists had already questioned whether corporate earnings growth momentum could be sustained without any clear sign of improvement in the efficient employment of capital and human resources.

The point they made was driven home by the outbreak of the global credit crisis, which resulted in, among other things, a sharp fall in demand from developed countries for imports from the emerging markets, including China, India and Brazil. To be sure, the government $586-billion-yuan economic stimulus package is expected to help soften the blow of the so-called financial tsunami to the corporate sector. But the crisis seems to have served as a rude reminder to many Chinese corporate executives that they can no longer rely on cheap capital alone to maintain earnings growth.

It was, therefore, not a surprise to have read that Gome, China's largest consumer electronics retailer, under a new management team, is changing its business strategy from one characterized by unbridled store expansion to a new approach that emphasizes improving the efficiency and profit-earning capacity of existing stores. The new strategy calls for, among other things, a reshuffling of the stores' product mix with greater effort placed on pushing sales of smaller electrical appliances with lower unit prices but wider profit margins than traditional white goods.

Retail analysts said that even if the company's former chairman had remained at the helm, Gome would have no other choice but to make such a change. Many of its competitors, including arch rival Suning, have adopted similar strategies as they have come to realize eventually that big is not necessarily better.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 02/17/2009 page8)