Every penny counts for Zong

Wahaha's owner tops rich list but faces challenges in expansion plans

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16 Mar 2012
Week in China

Despite being China's richest man, Zong Qinghou is famously frugal. He told the Global Entrepreneur that he spends no more than $20 a day on himself. "My only exercise is doing market research… my only hobbies are smoking and drinking tea," the chairman of Hangzhou Wahaha Group advised. "Other rich people have bodyguards, I just come and go on my own."

Zong's approach is also said to be reflected in how he runs his company, the third-largest soft drink company in China. Wahaha's headquarters for more than two decades has been a nondescript six-floor building next to a railway station in Hangzhou. And senior executives grumble that Zong personally reviews every expense, right down to the purchase of new brooms by the cleaning staff. Others find it hard to believe that the chairman still eats his meals at the staff canteen.

Perhaps that's also why Zong once again took pole position in last week's Hurun Rich List, a ranking of China's super-wealthy (he first claimed the title in 2010). According to Hurun, Zong has an estimated fortune of $10.5 billion.

Let's backtrack a little…

China's richest man has a reputation for more than his wealth. Readers of WiC will also remember Zong as the man who waged a very public and acrimonious legal battle against Danone, with whom Wahaha had a 13-year joint venture. Zong ended up buying the French food group out of the JV for $414 million, a fraction of what Danone had asked. The dispute is a textbook example of some of the perils of joint venture arrangements in China (see WiC39). During the confrontation, the tycoon also proved controversial, with the accusation that Zong stoked up nationalist sentiment during the legal battle. The billionaire then met with a local backlash when the press discovered that he had applied for permanent residence in the US.


Zong may be controversial, but he has created a national beverage giant out of nothing.

Nevertheless, to many Chinese, Zong is a business hero. That's because in a country where tycoons are often the children of politicians, Zong stands out as the son of a government clerk. He worked as rural labourer in coastal Zhejiang province for 15 years until 1978 before getting a job at a paper box factory in Hangzhou.

It wasn't until 1987 that Zong's luck turned. He and two retiree teachers took a loan of Rmb140,000 ($22,230) to start a business selling popsicles, soda and stationery. They went on to build Wahaha (it means "children laughing" in Chinese) into a beverage maker that made Rmb67.8 billion in sales last year.

Zong may be controversial, but he has created a national beverage giant out of nothing.

Political ambitions?

Like many businessmen, Zong is also a delegate to the National People's Congress (NPC), China's parliament. And over the years he has made it a habit to speak up at the annual meeting. This year is no different, and he has put forward 11 proposals.

One of the most widely reported is Zong's call for cuts in personal income tax. He argues that lowering the tax will increase domestic consumption, a move that should also jump-start the development of local enterprises.

Aggrieved when his suggestion was ignored Zong then voted against the government's budget report (he was one of 438 NPC deputies out of 2,782 to vote ‘no').

Zong also touched on the topic of corruption: "Businessmen need to understand politics, but they should not take part in politics. And even though government officials are involved in politics, they should not get involved with business. The problem: one cannot be a government official and make money at the same time."

Meanwhile, changes at Wahaha…

Zong's Hangzhou-based company ranks third in China's soft drink market by volume, says Euromonitor, trailing only Coca-Cola and Tingyi (see our Focus issue, Magnificent Seven). But to expand Zong thinks Wahaha needs to diversify into other areas. "It is time to expand both upstream and downstream," he told the Financial Times last year. The goal, he said, was to become one of the world's "strongest" 500 companies within five years. Zong saw most potential in the scandal-prone infant milk formula market. Recognising that consumer trust is a key issue, Wahaha sources its own formula from a Dutch milk powder company. More recently it announced plans to invest in dairy farms in Australia to expand its milk imports.

Wahaha also aims to break ground this year on convenience store outlets and a supermarket chain, entering a new role as a retail operator. Zong says building supermarkets across China will allow him to enter businesses that have higher margins than manufacturing but also to take advantage of Wahaha's already far-flung distribution network. Since urban centres such as Beijing and Shanghai are already saturated, Zong says he sees greater potential in smaller cities.

Wahaha – sitting on a cash-pile of Rmb15 billion at the end of November last year – has also been looking internationally for growth.

Another potential advantage is that local governments in second- and third-tier Chinese cities are often more
eager to work with the beverage giants. Zong told the Economic Observer that Wahaha is already in talks
with city governments to buy land and open as many as
100 new stores.

The challenges ahead?

Wahaha – sitting on a cash-pile of Rmb15 billion at the end of November last year – has also been looking internationally for growth. Progress has been slow. Wahaha tried to acquire a yogurt company in Japan last year but the deal fell through. Zong told media that foreign governments have been reluctant to approve deals with Chinese companies. The reason? "Anti-Chinese sentiment is still rooted in some people. China has to try to find a win-win solution to its pursuit of overseas investment."

Danone executives will be forgiven a wry spluttering of their morning yogurts.

But Zong seems undeterred. He is now considering launching the Wahaha brand in South Africa after a visit there last month. "We are still in talks to discuss possible investment," Zong told the China Daily, even mentioning sectors like minerals and agriculture. "We keep the opportunities open, and everything is possible."

Wahaha will have noted that some of its domestic rivals have already started to expand overseas. Last year, Bright Foods, a state-owned food conglomerate, acquired control of Australia's Manassen Foods in a deal valued at almost $537 million.

Never too far from controversy…

But last week Zong grabbed headlines again when he announced to reporters gathered at the NPC that he has given up his US green card. He claims that he had only applied for permanent residence in the US in the first place because he was frequently travelling there on business and that applying for a visa every time was a hassle.

But Zong also defended the other tycoons who have emigrated, saying that just because they hold a foreign passport does not mean that the business bosses aren't patriotic.

Still, rumours were soon circulating about Zong's other reasons for giving up his green card. One of the most widely discussed
on Sina Weibo was that it related to Zong's US tax bills. Though he denies the rumours, it wouldn't be the first time that the billionaire has been accused of a dispute with the taxman. Caijing reported allegations in 2008 that Zong was being investigated for avoiding nearly Rmb300 million in Chinese taxes. He eventually settled the matter with local tax authorities, and blamed a
third party for the situation.

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