As China's government accelerates its `go west' campaign, some companies are embracing the opportunities, while others feel trapped by the inherent disadvantages of being far from the country's most dynamic regions.
Xian is a major tourist centre but high-technology is the other pillar industry. Seastar Scientech Enterprises Group is one such company to have thrived on its remote location. Seastar Scientech started out as a computer vendor 12 years ago and now it is involved in a dozen disparate sectors: soft drinks, supermarkets, fashion, advertising, furniture, trading, pharmaceuticals, tropical plantations, property, restaurants and film-making. The company's 61 subsidiaries in China and overseas generated revenues of Yn2.1bn in 1999, making it the ninth largest private company in the whole of the country.
Shaanxi province lags way behind prosperous coastal regions in terms of infrastructure, finance, and science and technology. However, in the hinterland it is easier to stand out and win concessions, according to Seastar's founder and president Rong Hai. "If we were in the coastal areas, we wouldn't count," he observes.
Spectacled and soft-spoken, the 42-year-old Rong worked as a computer lecturer at Xian Communications University for nearly a decade. He believed the campus was lagging behind a fast-changing society and he got a taste for business by moonlighting as a computer specialist for local companies. In 1988, Rong invested personal savings of Yn30,000 set up a computer research institute working out of a garage with a few colleagues.
The founding fathers travelled the city by bicycle in search of business. After two months, they struck their first deal with a local bank to install computer programs. But the real money came from selling computers rather than installing software. Seastar concentrated on trading and by 1990 it had recorded Yn4m in sales.
Leading computer vendor
The breakthrough came when Rong heard that a state-owned computer company had turned down a deal to sell Compaq computers. He followed the Compaq representative to Shenzhen and convinced him to sign a contract. The US company wasn't convinced it could trust a small firm from Xian, so it demanded Seastar pay an advance of US$1.1 m and set an annual sales target of US$18m. In just six months, Seastar achieved US$13m in sales.
Seastar became one of Compaq's general agents in 1993. The next year, it sold more than 30,000 computers, representing about 5 percent of all computers sold in China. By 1995, Seastar had become China's largest computer vendor, with Yn1bn in sales. Last year, its listed subsidiary Seastar Technologies recorded a sales revenue of Yn484m.
While Seastar shows how a group of talented intellectuals can secure a niche in the west, Huanghe Enterprises Group, a Lanzhou-based brewery founded by peasants, is a more familiar example of a company struggling with its remote location.
Since it was founded in 1985 by Mr. Yang Jiqiang, Huanghe has grown from a loss-making township agricultural machinery factory to one of China's 10 largest breweries. But recently production has slowed down and the company has been embroiled in a financial scandal. Yang's former financial advisor is alleged to have embezzled mil-lions of yuan in company funds when she was assigned to prepare for the firm's initial public offering. Although Huanghe has successfully floated its shares and the financial advisor detained, the money has yet to be recovered. Yang admits he should have been more careful employing people.
But this has not been the only setback. Lanzhou's notorious pollution and remoteness are a deterrent to many ambitious executives. There are no direct flights to Hong Kong, let alone overseas. Although the government has started to expand the airport and is building more roads, there is little going for this industrial city by the Yellow River.
Yang's general manager and several senior managers walked out of their jobs just several months after being recruited. The general manager had been hired on an annual salary of Yn360,000.
Though the largest brewery in north-west China, Huanghe does not dominate its hometown Lanzhou, where it only has about 30 percent market share. The state-owned Xiliang Brewery has a 50 percent market share something that Huanghe's deputy general manager Cheng Long attributes to public sympathy towards the smaller company.
Huanghe's biggest market is in southwestern China, Tibet and Qinghai. The company relies on trains to transport its beer. "We are Lanzhou Railway Bureau's largest client," says Yang. But there is no railway to Tibet so beer is transported by train to Geer-mu in Qinghai and then by road to Lhasa.
In China there are more than 800 breweries, yet only a couple, including Tsingtao, produce more than 1m tonnes annually. Huanghe is a regional producer and its performance has been sluggish.
It produced 220,000 tonnes of beer last year, generating Yn800m in revenues, slightly up on the previous year. Only two or three cents profit is made on every bottle of beer sold. Nevertheless, Huanghe has been expanding beyond Gansu, at least in rescuing state-owned enterprises. It has acquired eight loss-making state-owned breweries and bottling plants in Gansu, Shaanxi, Qinghai and Chongqing. Its biggest capacity increase was achieved by the purchase of Wuquan, a bankrupt state-owned brewer.
Some of the takeovers were driven more by political directive than business opportunity. For example, Lanzhou government approached Huanghe to rescue a state-owned bottle factory and glass factory. "They said we were profitable and anyway we needed more bottles for our beer," says. Cheng. Huanghe's production capacity increased four-fold after the acquisitions.
Government support has been less forthcoming in other areas. This year Yang persuaded a European bank to lend it Yn60m to import a new production line from Germany. Lanzhou government refused to act as a guarantor, saying it was the responsibility of the district government.
Yang was incensed, saying he felt like a football being kicked between bureaucracies. The scheduled production day of April 1 passed and interest was accumulating on a daily basis. "It takes a month to get things done in Gansu when it only takes a day else-where," Yang says.
Recently, the government finally agreed to back the loan and the production line is now being installed and should be operational by the end of this year.
Seastar has benefited more from government support. In 1994, it invested Yn45m to form a joint venture with American Lead International to produce fruit juice and yoghurt. The Rong brand juice achieved 80 percent market share in Xian. Company official Wang Hongrui attributes the success to local government protectionism. Now, the soft drinks subsidiary is Seastar's most profitable division, with six production lines and an annual capacity of 80,000 tonnes.
Rong says remoteness means opportunity for example, Seastar has introduced supermarkets to the province at a time when very few existed. Rong was very impressed with the supermarkets he visited abroad. Seastar worked with Hong Kong-based China Resources and opened Xian's first supermarket in 1993. During the first few days, curious locals gathered outside the shop without daring to enter. After several promotion campaigns, business started to pick up. Now, Seastar has 26 supermarkets across Shaanxi and Shanxi provinces.
To help develop supply chains for the supermarkets, Seastar established subsidiaries in wholesaling, and foodstuff and seafood production. It has even expanded into tropical plantations. As early as 1990, Rong's father, an agricultural official in Shaanxi, opened a plantation on Hainan island to grow coconuts, mangoes, aloe vira and beetel nuts. More than 30,000 turtles are bred in a dozen ponds. Most of the produce goes straight to Seastar's supermarkets.
Despite diversification, Seastar regards computers as its pillar industry. It has several computer-related subsidiaries, including one manufacturing its own brand computers. In May 1999, Seastar listed its computer subsidiary on the Shanghai Stock Exchange.
Rong reckons the `go west' campaign will be unlike the development of China's coastal areas, which were initially centred on the special economic zones. In the west, the government will aim to improve the general infrastructure and investment environment, rather than create small pockets where preferential policies exist. In addition, Rong says local governments have made it easier for private startups to borrow money from banks and this policy should lead to the emergence a few large private companies.