On the 6th Anniversary of the Founding of ChemChina
Last year, I wrote an article on the 5th anniversary of the founding of ChemChina, saying that we would be striving to begin another five new years for the company by enhancing our competitiveness amidst the economic crisis under the guidance of a correct business philosophy and corporate values. Going by the principle of letting development strategy decide operational activities, we have been working closely with world-renowned consulting firms in defining the 12th five-year plan for the country. The preliminary study done by our the project team indicates that the growth of sales and assets of ChemChina have reached 31% and 34%, respectively, over the last six years, much higher than the benchmarks of 1% and 4% in the industry. Likewise, the company’s EBITDA is also growing much faster than the average rate of its global peers. Today, ChemChina is among the world’s top 20 chemical giants in terms of both sales and assets. It is indeed an “amazing growth story”.
However, achievements represent only the past; our focus should be kept on the future. Looking to tomorrow, both statesmen and entrepreneurs believe that 2010 will be the most complex and changeful year since the dawn of the new century. However, how will the global competitive landscape change? No one is able to tell exactly. Turbulence and lack of tranquility is an intrinsic feature of the business environment today. Globalization, technological innovation, demographic expansion and environmental stress—all these factors are intertwined to reshape the competitive landscape across the world. To invest or bide our time, to restructure or optimize business, or to go for listing or mergers and acquisition—we are constantly perplexed by different options. Strategic decisions makers in the business community always find themselves caught in the dilemma of either missing an opportunity or taking the wrong action. Looking into the future at the new starting line, we at ChemChina need to find a clear answer to the two questions of what shall we do, and how shall we do it?
Last year, throughout the national campaign of learning and implementing the scientific approach to development, I suggested that for companies like ChemChina that are in a fully competitive market, structural readjustment will be the most important endeavor. Based on our current business portfolio and in light of the general trend in the global chemical industry, we have decided to shift our priorities to new businesses with higher value-added and growth potential. We will strive to be competitive in material science, life science and environmental science, businesses underpinned by our strength in basic chemicals, which means ChemChina will have a new business pattern of “3+1”. This new formula was challenged at the beginning for being too advanced to start with or so dramatic that our traditional businesses risk being marginalized. However, these considerations are biased and even erroneous. We need to understand that it takes two to three decades and even longer for a new business to achieve real competitiveness. It requires the companies to forge a unique DNA in their offspring that will make the business vibrant forever. A clear vision of business restructuring gives us the silver lining of the crisis, providing us with direction like the lighthouse on the sea. However, the lighthouse itself cannot substitute for the struggles of the sailors. Market competition waxes and wanes. The eventual winners are the survivors of the market jungle. Only the captain and sailors who can maneuver freely on the “red ocean” are qualified to sail on the “blue ocean”. Therefore, our practical choice is single and simple: stay focused on management transformation to improve our management and competitive level with limited resources, however the circumstances may change.
We have foreseen clearly that change in the mode of development for ChemChina will remain an arduous task, for a wide range of reasons. A number of our enterprises still cling to the old, worn idea of relying on massive investment for growth, and a healthy mechanism of organic growth has yet to be established. Extensive management and low-end products remain pronounced problems. Different business units vary sharply in performance and profitability. Capital utilization across the group company is low, which has a negative effect on the overall return on investment. This low profitability is attributable to the lack of a stable supply of upstream feedstock and raw materials, the weakness of overall business planning and layout, the untapped synergies latent among the businesses as well as the problems of homogeneous products and poor marketing and branding, etc. The low capital efficiency is the result of poor allocation of productive resources such as capital and technologies, the overcapacity in the industry as a whole and the excessive or redundant investment leading to idle capacity and low turnover of assets. These are not matters of where the competition is. These are matters of how one’s competitiveness is. This is the “unbearable weight” for traditional chemical companies like us. Compared to our peers, we have huge room for improvement. To achieve value creation, transformation is the only way.
As most of our businesses are in a fully competitive market, cost-effectiveness is critical to our competitive edge. At the current stage, the space for profit has been squeezed heavily by overcapacity and global competition. Therefore, only with enhanced management can we form our advantageous competitiveness. Unfortunately, the majority of the business managers we have today are experience-based managers. Therefore, we need to introduce and cultivate professional business managers to help us survive and thrive amid cut-throat competition. In that context, we have decided that management transformation is the central task for ChemChina in 2010, as it is the consensus we have reached in battling the financial crisis and overcapacity and cyclical change in the global chemical industry.
Management transformation, I believe, is essentially the effort we need to make to achieve sustainable and profitable growth for the business. It needs to be implemented in a holistic and multidimensional way, and applied through three key aspects: organizational structure, human resources and management methods.
Organizational structure is the basis for transformation. Without the right structure, clearly-defined interfaces, and scientific processes, transformation will not have the right soil in which to grow and bear the right fruits. Therefore, in order to set roots for the transformation in organizational structure, we need to reduce the management hierarchies, cut the number of subsidiary plants, clearly define rights and responsibilities, and promote the centralization of corporate legal persons.
People are the essential element in executing the transformation, which starts from one’s minds and needs to be translated into one’s deeds. Therefore, a successful transformation requires the unity of thoughts, management championship and full staff participation. Particularly important for the success of this transformation are initiative and a sense of urgency. Liang Qichao, the activist of the Hundred-Day Political Reform, once argued, “The world is destined to evolve from turbulence to tranquility; the source of victory will change from physical might to mental prowess. Therefore, for a nation to be strong in today’s world, the first priority is to improve the intelligence of its people … to sum up in a word, the success of political reform essentially relies on the education of talented people.” The crux of Liang’s argument is that the success or failure of reform hinges on the human factor: it depends on the support, advocacy and personal exemplary role of the management, particularly the senior management, of an organization.
Therefore, only through enhanced human resources, building in a human-oriented approach, can we strengthen our soft power of competitiveness and provide organizational and resource guarantees for the smooth progress of the management transformation. As the proverb says, a workman must first sharpen his tools if he is to do his work well. The right methods are the sharpened tools for the task of transformation. I always say that the business philosophy of ChemChina is to do the right thing in the right way. Likewise, in management transformation we need to find the right method that is the most effective and least resistant. I believe this method is the “introduction of strategic investors, professional managers and external advisers” we have proposed. To be specific, enterprises with the right conditions should actively introduce the strategic investors to create the right governance environment for the transformation endeavor. The introduction of professional managers and external advisers is intended to draw in the systemic and specialized best practices, which will help us avoid making unnecessary mistakes.
Since the beginning of this year, we have engaged with Stern Stewart & Co, the creator of the concept of economic value-added (EVA), to help us set up the EVA-based business performance assessment system. We have been working with McKinsey and Nexant on the 12th five-year plan project of ChemChina. We have hired Deloitte to assist us on the enterprise risk management project and employed IBM and Hewitt for our human resources transformation project. All those companies are world-class professional advisers that are well-respected and expensive. But we have opened our arms to welcome them because we need their expertise to reengineer our management processes, build up a new and complete management system from top to bottom, and harvest the fruits of scientific management, so as to lay a solid foundation for the change of our growth model from an extensive one to an intensive one.
Time never returns like sailing boats! The past efforts we have made only contribute to the foundation for growing our competitiveness, rather than competitive strength itself. The next five years are the critical period for ChemChina to grow from being big to strong and form its core competitiveness. We not only need to have a clear vision and targets for the company as it goes forward, but must also change our mode of development, strike a balance between the scale and quality of development, optimize our business portfolio and go all-out in implementing the transformation of management, so as to achieve valuable growth.
Finally, let’s review the story of the rebirth of the Alban eagle through the fire. The Alban eagle is a special eagle from Monte Alban in Mexico. It can live to 70 years old. However, when the eagle reaches 30 years old, its beak gradually becomes curved, its feathers stiff and its claws blunt. “To live or not to live,” that is the painful question. The Alban eagle chooses rebirth through fire for itself: it goes to find a cave on the precipitous cliff, and beats its beak against the rock until it falls off with blood. Four months later the new beak grows out and the Alban eagle pecks its feather all off with the new beak. Another four months pass before the eagle becomes fully fledged again. Finally, the eagle pulls out the nails on its claws, one by one, and waits another four months before the new nails have grown in. After this long and painful rebirth, the Alban eagle once again hovers in the blue sky, flying higher and higher.
If animals can be as resilient and tenacious as the Alban eagles, cannot we as man—let alone the unyielding and enterprising ChemChina people?!
Ren Jianxin