From iron groups to oil producers, a growing number of Chinese companies are now rushing into the financial services sector in search of a higher profile and big returns.
Haier is one of China's best known brand names for a range of goods such as microwaves, refrigerators and televisions. Its quest for greater diversification has recently taken the Qingdao-based company into new sectors such as mobile phone handsets and financial services. In December, Haier New York Life – a Yn200m, 50/50 joint venture with New York Life Insurance – began operations. Though it might seem a stretch for a predominantly white goods company to move into insurance, Haier is confident about its prospects in this new sector.
"Both Haier and New York Life recognise that the development of China's life insurance market offers a lot of potential and is intensely competitive," comments Haier spokesperson Su Fangwen. "But we both are willing to blaze new trails in this emerging market."
The growth potential is certainly tempting. In 2002 insurance premiums jumped 45 per cent to Yn305.3bn, including a 60 per cent leap in life insurance premiums to Yn227.5bn. And the life insurance investment is far from being Haier's sole venture in financial services. Within the past year, it has become a shareholder in Qingdao City Commercial Bank and the biggest investor in Changjiang Securities.
Haier isn't alone in jumping enthusiastically into financial services. From iron groups to oil producers, Chinese companies are rushing into the fast-growing sector hoping for big returns.
In February last year, China National Petroleum Corporation and Italy's Assicurazioni Generali, one of the world's five largest insurance groups, announced an insurance venture. Three months later, China National Offshore Oil Corp – parent company of the New York Stock Exchange-listed CNOOC – formed a Yn200m life insurance joint venture with Holland's AEGON Group. And in January this year, Baosteel invested an undisclosed amount in China Pacific Insurance Group.
All these companies have a successful example to emulate. "They are trying to copy General Electric's model," says John Huang, a partner at Shanghai's Allbright law office. GE started out making light bulbs, but today almost half of its earnings come from financial services. That has transformed GE's public image. "GE used to make things like televisions and electrical fans. Now people look at it as a financial services company that does some manufacturing," points out John Growboski, a Shanghai-based partner with law firm Baker & McKenzie.
A desire for that kind of recognition drives many Chinese companies, according to McKinsey & Co partner Jonathan Woetzel. "I can't tell you the number of Chinese companies that have asked us 'what are the accounting rules to be a Fortune 500 company'," he quips. Indeed, a press release touting the Haier/New York Life tie-up ends with the line: 'Haier's goal is to become one of the Fortune Global 500 and to become a worldleading brand.'
A search for better returns also plays a role, especially for cash-rich companies in highly competitive industries. "If you're a steel mill in an industry with surplus capacity, then you're looking for somewhere else to invest any new capital," points out Douglas Hansen-Luke, Hong Kong-based head of strategic sales and marketing at ABN Amro Asset Management.
Take Baosteel, which has lots of cash and little incentive to invest it in the group's core business. Its investment in China Pacific was not the conglomerate's first venture into financial services. When China's mutual fund business began to expand in 1998, Baosteel made its first foray into the financial services sector with the founding of Fortune Trust & Investment. In July 2002, Fortune established a fund management joint venture with SG Asset Management, a unit of France's Soci�t?G�n�rale Group.
While it's easy to question the wisdom of such seemingly opportunistic investments, some have been successful. For example, Shandong Power turned a profit when it sold its holdings in Xiangcai Hefeng Fund Management Co to ABN Amro when the Dutch financial company bought a 33 per cent stake in February. Because investing in the financial sector is still relatively unrestricted for local companies, the return on investment can be "quite high", says a Shanghai Stock Exchange executive. "Some [investors] have sold equity in fund management companies, and the return on equity has been something like five to book," he says, adding that investors also earned dividends before divesting.
Not all Chinese companies that move into the financial services sector are experienced international firms such as Haier or huge conglomerates like Baosteel. On its website, the central China-located Hunan Valin Iron & Steel Group lists as one of its missions the 'founding of Valin financial services group'. The company sunk Yn700m in Xiangcai Securities, becoming its largest shareholder. Valin is also an investor in Everbright Bank, and intends to put another Yn200m-300m into venture capital. Hunan Valin also owns a controlling stake in an information technology company and has an investment in a biomedical firm.
Management capability
But, as the Shanghai Stock Exchange executive points out, few Chinese companies "have the kind of management capability that GE possesses". Advisors also caution against trying to play a management role in a new industry. Says an investment banker at a domestic investment bank: "I don't think it's wise for [Baosteel] to try to get involved in management" at China Pacific. His bank advised the steel group not to become an insurance company. However, the banker concedes that "the insurance industry is one of the most attractive investments in China".
Such opportunistic expansion calls up the ghost of a movement in China in the late 1990s, when the central government became convinced that the way to save sinking stateowned enterprises was to form giant conglomerates along the lines of the Korean chaebol. That's not the case with these new expansions, says John Anderson, Goldman Sachs' executive director for Greater China economics. After the Asian financial crisis of 1997-98, "the chaebol idea died a slow, withering death", he says.
Companies diversifying into wildly unfamiliar sectors today are making those decisions on their own, according to Anderson. "The role for individual entities to have a say in allocating resources is much greater than in 1997," he says. "There are plenty of enterprises that are looking around – particularly steel companies – which have cash, liquidity and razor thin margins. The financial services sector is underdeveloped, so it's attractive." It would be premature to condemn this new investment trend, he believes. "It's not smart and it's not stupid. It depends on how successful you are."
Some financial services newcomers, like Haier, seem to be watching for potential potholes on the road to becoming a financial powerhouse. Though the chairman will come from Haier, the Chinese company "is hiring insurance professionals with international experience" as managers, says Su. Even so, Chinese companies should keep an eye on their model and be aware that successful multinational corporations are prepared to retrench when returns on investment fall below a certain threshold. For example, GE's insurance businesses, once one of its strongest groups, lost US$509m in 2002, and the group is now trying to sell some of its units in this area.
