Dairy giants Mengniu Dairy Group Co., Ltd. and Taizinai Group Co., Ltd. have both undergone some testing months in the aftermath of the melamine crisis. Mengniu encountered serious financial problems as a direct result of the scare surrounding the controversial dairy additive. Meanwhile Taizinai, one of the largest lactobacillus drink manufacturers in China, was also caught in financial troubles, but for different reasons.
In October, it was said that Taizinai had ran into financial difficulties. The company was forced to stop production, freeze salaries and seek more funding. Then rumours started that its investors such as Actis Capital LLP, Goldman Sachs and Morgan Stanley had begun liquidating the assets and planning a full takeover, while Li Tuchun, founder and Chairman of Taizinai, had given up control of the company. Even his assets were allegedly frozen.
On October 31, Taizinai announced that it was looking for strategic investors, and was likely to sell shares and production facilities to raise hundreds of millions of RMB, subsequent to a due diligence investigation. The group claimed the investors were renowned companies and venture capitalists in China, and Li was also to keep control of the company.
When asked whether they were considering investing in Taizinai, heads of several famous investment banks and private equities (PE) indicated that only corporate investors such as Hangzhou Wahaha Group Co., Ltd. and Fujian Qinqin Incorporated Co., Ltd. would be interested.
Confronting Danger to Stay Alive
Li Tuchun had a legendary past. 30 years old, he went to Shenzhen to make his fortune. He had printed wall calendars, sold grain and cooking oil, run a karaoke lounge, a restaurant and, later, a video hall. At the age of 36, he tasted a lactobacillus drink called “Huolibao” for the first time and became convinced it had great market potential. He then went to Huolibao’s producer, a state-owned enterprise in poor shape and with low economic returns, and solicited the chief engineer. In 1996, Li set up Taizinai from scratch, basing the company in Hunan province’s Zhuzhou city.
The rest of the story is widely known. One year later in 1997, Taizinai won the sub-primetime commercial break auction on China Central Television (CCTV) with a bid of RMB88.88 million (US$13 million), immediately making it a well-known brand in China. Later on, he placed ads in newspapers to recruit distributors throughout the country. As a result, Taizinai, the CCTV sub-primetime commercial bid winner, experienced rising market demand and set up a sales network in record time. The small local company whose annual output was less than 80 million packs had suddenly gone nationwide. In this process, media investment undoubtedly made a significant contribution.
This was the most important battle in Li’s career, and helped him come up with a way to develop his company rapidly. Fond of history, Li used to study the rise and fall of many CCTV primetime commercial bid winners in the 1990s. He found that most of them failed because, although they could open the market through TV commercials, they didn’t produce products good enough to meet consumer demands. Li was confident that Taizinai was a good product which could turn profitable within a short time as long as the market was open, and the value of intangible assets (in this case, an RMB88.88 million (US$13 million) media investment) would hold for years.
It was with this confidence in his product that Li betted all he owned on media investment. Quite different from his rivals’ approach, Li first built the Taizinai brand, then fostered the market and, finally, built production facilities. Within a short time, the company had more than 3,000 dealers in China and had become the number one lactobacillus drink manufacturer in the country, with production facilities in Zhuzhou, Beijing and Huanggang.
Li started from scratch and carved his own path by investing heavily in media campaigns. The typical character of Hunan people, ambitious and resolute, helped Li accomplish his success, but also sowed the seeds of future crisis.
Being ambitious and resolute meant that Li at heart believed in the philosophy of “confronting death in order to survive”. He also believed that every crisis had a winning solution. He still talks with much emotion about the first capital crisis that Taizinai encountered.
Soon after Li had bet all he had on the CCTV primetime bid, an investigation showed that the home-made milk powder used in his products failed to meet fermentation quality standards. If recalled, these products would have to be thrown away, and the company stood to lose more than RMB20 million (US$2.9 million). At that time, the company not only owed a large amount of commercial expenses, but also faced the huge pressure of purchasing raw materials and increasing production in a short time frame. After balancing the need to tackle the crisis on hand against long-term ambition, Li decided to recall all the products, postponing the payment of employee salaries for more than six months.
This experience, although painful, also helped him realize that product quality was underpinning the existence of his company. For a long time afterwards, the company imported milk powder from New Zealand, although it cost more than twice of local milk powder.
Whether intentional or not, Li is unwilling to compare his company to other players in China, including Mengniu. He stressed in interviews that Taizinai ranked among the top three lactobacillus drink manufacturers in China, and was not in the same industry as Mengniu and other pure milk product manufacturers. According to him, Taizinai produces revolutionary products, while pure milk will soon be phased out. Unlike Mengniu, Yili and other dairy product giants, “Taizinai is against blind expansion of scale,” said Li, “So far, we have not received any financial support from the government. But we can survive and develop on our own.”
From 2002 to 2005, Taizinai’s annual sales increased from RMB100 million (US$14.6 million) to RMB1 billion (US$146 million), as net earnings rose from RMB29 million (US$4.2 million) to RMB100 million (US$14.6 million). Li explained that, in 2002, the company received its first capital contribution from the provincial government after an equity restructuring round. Then it began to establish production facilities in China and entered a period of rapid expansion. This showed that it could only grow rapidly with adequate funding. It also showed that the company continuously confronted funding pressures.