In an attempt to generate more foreign exposure, CHINT Group Corporation multiplied its number of shareholders from 1 to 400. Nan Cunhui’s now owns less than 30% of his own company. At the time, mounting pressures forced Nan to introduce a new equity structure to separate ownership from administration. The modern corporate governance model features checks and balances between the board of directors and the board of supervisors. But getting listed by accumulating capital is just one of the steps being taken towards overseas markets. CHINT Group’s Wang Yongcai says it’s the biggest change in CHINT Group’s equity structure in more than 20 years.
The Stock Dilutions
In the initial stages, it was easy to frame stock rights. In 1984, Nan Cunhui and his companion Hu Chengzhong set up Qiujing Switch Factory in Leqing County. Their partnership fell apart in 1990 due to different ideologies, with each of them getting RMB1 million (US$142,990). At that time, the factories total sales volume was RMB10 million (US$1.4 million).
During this period, bank loans were rare, and raising enough capital to cover daily operations was a challenge. Nan realized the company appeared to be too risky to outside investors, so he decided to diversify the stock among his family. He absorbed US$150,000 and shared the stock with his uncle, his brother, his nephew and his brother-in-law. These people were the original five shareholders of a Sino-US joint venture called Wenzhou CHINT Electrical Appliance Co., Ltd. Nan Cunhui owned 60% of the shares with the other four holding the remaining 40%. However, the newly-found CHINT could not make itself among the leading electric appliance companies in Liushi, Wenzhou.
Over the next two to three years, many enterprises in Liushi began to flourish, thanks to new economic policies from the central government. Liushi was flooded by many cottage industry stores and factories, producing all kinds of goods which could be sold immediately after being produced. CHINT began to realize that it could outperform its competitors in some products, but it could not beat so many manufacturers in one city. In addition, because many of the products produced early on were of inferior quality, companies in Liushi were forced to use well-known brand labels on their products in a bid to make them marketable. As a result, different manufacturers became affiliated with certain brands and had to pay brand management expenses and usage charges.
This mode has some advantages. It features a complete series of products with a single brand. It also provides convenience for either receiving orders or selling goods directly to distributors. By 1993, CHINT was making RMB50 million (US$7.1 million) in annual sales, an increase of 400% within three years. In early 1994, the Wenzhou Municipality authorized the establishment of the Wenzhou CHINT Group Corporation. It became the first enterprise group in Wenzhou to go public with its net capital soaring from just over RMB4 million (US$571,960) to RMB50 million (US$7.1 million).
The affiliation model was not an ideal way for brand users and brand franchisers to cooperate closely. The brand franchisers lacked effective control over the affiliated enterprises. Everyone was an independent corporate entity. As a result, an increasing number of problems outweighed any rise in profits. Some enterprises were pirating the CHINT name for their own fake, unapproved products. Several of its branches produced the same goods and competed with each other in the same market. Some companies cheated CHINT out of profits by falsifying accounts. Others refused to spend money on technical innovation. The situation became untenable. Other large groups like CHINT were facing similar problems. Many of them became mired in constant haggling and eventually collapsed.
In 1996, when the group had been public for three years, Nan Cunhui decided to offer stock to its member enterprises. It was the company’s second stock reform. After consulting with some experts, Nan mobilized upper management and divided them into discussion groups. Their task was to tackle six major problems including production, management and workflow. He also held a secret shareholder meeting in a remote area. The point of the meeting was to illustrate whether it was good to be united or to be divided. He also maneuvered CHINT’s stock rights in an effort to gain control and retain a greater say in the group.
In the end, he forged two corporations limited by shares and three limited liability companies, in light of different types of products. Through this process, Nan eliminated the corporate capability of its member enterprises. In exchange, the managers of its member enterprises would become CHINT’s minority stake holders by purchasing stock and their rights were protected by a certain organization set up by the group. Nan aligned these companies under CHINT’s banner. CHINT now had thousands of products whereas Nan’s share in the group dropped to 40%.
The dilution also had other benefits. “Just imagine those people who were able to operate the wharves and start their own factories. Additionally, they each had their resources and capabilities. After the dilution, a lot of competent people were introduced into CHINT. Later on, CHINT’s products, market share and its business scale soared respectively,” says Wang Yongcai. The new opportunities and favorable location combined with a new level of harmony among various employees helped CHINT expand quickly. Soon, CHINT was the largest private enterprise in Wenzhou.
Essentially, CHINT was still a family-run enterprise. Most of the power lies with one family. In the course of its economic development, CHINT was able to construct low-voltage electrical apparatus, and power transmission and transformer equipment, instruments, communication-capable apparatus and auto electric parts. Its total assets rose to RMB800 million (US$114 million). This created an urgent demand for capable people in Wenzhou, a city known for its technology-intensive electrical industry.
In the early days of CHINT, Nan visited many state-owned enterprises in Shanghai and other areas in an effort to poach new talent. He lured engineers out of retirement with high salaries to teach the workers better techniques as well as research and development. In a competitive environment, it was a challenge to keep the best talent. Weakness in operations and management, techniques or marketing could quickly bring the company down. When the new human-power capital concept was launched at CHINT, Nan began his third equity reform.
In 1998, CHINT launched a stock reform in its pillar company-the low-voltage apparatus enterprise-and introduced a stock distribution mechanism of element shares, including management shares, technique shares and operation shares. This led to many technical engineers, administrators and sales people becoming CHINT shareholders. Some of them became chief stake holders in the group, and a few of them even became multimillionaires.
Through the reforms, CHINT has forged an increasingly clear holding group structure with more than 30 stock holding companies and 31 relative ones under its control. In the midst of this, CHINT laid half of its assets on the electrical stock, instruments and equipment companies holding 85% of the stock. After the dilution, there were 115 core shareholders, including original investors, stake holders transformed from the owners of the branch companies, technical pillars and central operation management. Including those from the newly-built companies, the mergers & acquisitions and the management layers, CHINT has more than 400 stock owners. Consequently, Nan’s share in the group has since slid to less than 30%.
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