Fosun Group’s Guo Guangchang: Marrying Chinese Momentum to Global Resources

Atlantis-Sanya

Two decades ago, Guo Guangchang, a philosophy major from Fudan University, quit his job at the school and began doing market research on the streets. He and three other Fudan graduates put together $4,000 to set up what is now the Fosun Group. From such humble beginnings, the 46-year-old Guo has reached places — he is now 31 on the Forbes China rich list with an estimated wealth of $3.5 billion.

The Fosun Group is one of the biggest privately owned enterprises in China. It has interests across sectors, from pharmaceuticals and mining to real estate and steel. Today, its lines of business include insurance, industrial operations, investment and asset management.

The group has also expanded overseas, particularly in tourism. In 2010, Fosun bought a 10% stake in Club Méditerranée, the French resort operator. It has invested in Folli Follie, a Greek fashion group, and St. John Knits International, an American apparel maker.

Guo is clear that he will go where opportunity beckons. He wants to pair the opportunities that come with Chinese growth and dynamism to available resources abroad to take the next big steps forward. Guo spoke to Knowledge@Wharton about his plans and investment strategy.

An edited transcript of the conversation follows.

Knowledge@Wharton: In recent months, the Fosun Group has announced several investments in tourism-related projects. Has this industry become the focus of your future investment?

Guo Guangchang: We will indeed increase our investment in tourism. We have also set up an independent tourism commercial group under our flag. On the one hand, we would like to invest in international tourism service brands like Club Med. On the other hand, we will also get into the market as a hotel property owner. There may be investments of hundreds of billions of yuan in the future.

The new tourism group is overseeing our traditional assets like the Yuyuan Garden shopping mall in Shanghai, as well as Club Med, the French chain in which we invested as a minority shareholder three years ago, and Folli Follie, the Greek fashion group we invested in two years ago. This summer, we invested 512 million yuan ($84 million) for 1.97% of China International Travel Service and have become the third largest shareholder. [China International is a state-owned group with a Shanghai listing and is the biggest travel agency in China.] Meanwhile, we have tied up with Kerzner International Holdings, the global destination and luxury hotel management company, to build a hotel and ocean park — Atlantis — in Sanya, Hainan province, in southern China. Fosun will invest more than 10 billion yuan in the next three years on this project and Kerzner will be responsible for the management of the hotel.

“China doesn’t need bigger steel plants. People want better education, variety in tourism, high-quality medical service … a better life.”

Knowledge@Wharton: Why are you investing so much in tourism?

Guo: We want to cater to some of the changes China is witnessing as it grows. When income levels improve, the demand for tourism and education grows. At the moment, many tourism products offered in the market are homogenous. We would like to introduce up-market tourism and holiday products available globally to China to accommodate the shift in demand from simple sightseeing to leisure holiday travel.

Knowledge@Wharton: Your investment focus has been changing over the years. Do you have a strategy?

Guo: The growth of our company has to be in tune with the overall development of China’s economy. China has, in the past 30 years, accomplished a lot in infrastructure and city management. What is needed today is to upgrade these accomplishments to the next level. Fosun’s investment in the next 20 years will undoubtedly be different from what it was in the past 20 years. The logic is simple: China is in a different stage.

Right now, China doesn’t need bigger plants and higher steel production. Ordinary people want better education, variety in tourism, high-quality medical service, better service for the aged and, overall, a better life. Based on this, the Fosun Group will invest in new lifestyle projects that different levels of consumers in China can afford.

Take services for the aging population, for example. Our first project — the Starcastle Zhonghuan senior living community in Shanghai — has started operation this year. This community is offering a new lifestyle for old people. Apart from apartments, it offers public activities for the aged — restaurants, coffee bars, fitness rooms, chess rooms, painting rooms, classrooms, a library, a tea house, a computer center and a clinic service combining Chinese medicine and Western medical services.

It’s the same for tourism. What you will experience in Atlantis Hotel in Sanya is not just a few days’ stay in a hotel room; it’s a one-stop holiday experience including an ocean park, entertainment shows, shopping, special cuisine [and] international exhibitions…. It offers a totally different experience from our traditional hotels.

Knowledge@Wharton: I heard you have a theory of urban development — can you share it with us?

Guo: Urbanization in China in the past decades has facilitated the emergence of manufacturing. But the new round of urbanization will upgrade the service industry and city management functions. The Fosun Group will focus on this.

We have put forward a honeycomb theory of city management, [which] argues that a city should be an organic combination of all kinds of service functions. There will be more honeycomb cities in the future. Some can be tourism oriented, some finance oriented and some health care oriented. These functions are something Fosun can organize and integrate. We are going to consolidate different industries — for example, tourism, health care and services for the aged — with cultural tourism. We will integrate the improvement in both cities and industries to create a consolidated solution for an urban complex.

“The ‘China momentum marries global resources’ model refers to non-controlling equity investment and strategic tie-ups or joint ventures.”

Therefore, on top of tourism, we will strengthen investment in health care, education, and services for the aged. We have just announced an investment in a major hospital in Foshan, Guangdong province, and are planning to invest in dozens of hospitals in the next decade. We will cooperate with global medical institutions. All these efforts are to serve the demand for better industries and cities.

Knowledge@Wharton: The Fosun Group started global investment in 2010. What is unique about your strategy?

Guo: We have a core concept for our global investment strategy — China momentum marries global resources. Our strategy is to, first, increase our investment in China and, second, start our global operations. We will then integrate and consolidate these two competitive advantages.

Our investment is always based on “China momentum.” We have built up a very stable investment portfolio and subsidiaries under our flag, including health care, real estate, steel, mining, retail and services, which have all benefited from China’s strong growth. In addition, we have entered the asset management business and started our private equity venture. The returns have been stable.

Why do we want to “marry global resources”? This refers to leveraging the best practices of global markets. How do we have the courage to do something we have never done before? The reason is that we are not doing it from zero level; we are working with the best teams in the world to leverage their experience and resources. For example, on the seniors’ community, we are working with industry leaders from the U.S.; in tourism, we are now working with Club Med and introducing this brand into China. So we have a best brand and a best team on the project in China.

The “China momentum marries global resources” model refers to non-controlling equity investment and strategic tie-ups or joint ventures. These ventures will introduce global brands, technology, talent and business models to accommodate the future growth in demand in China. They will harness the value of China’s growth and share the returns and values with our partners from global markets.

Apart from Club Med and Folli Follie, in the first half of this year, we have invested in U.S. women’s luxury fashion brand St. John, Israeli medical cosmetology equipment and technology company Alma Lasers, and American company Saladax, which is in the area of testing and medical diagnostic services. Our target geographies for investment have expanded from Europe to North America and the Middle East. We will extend our investment to Japan, India and Indonesia this year.

Knowledge@Wharton: Critics say that the investments in global markets imply that some Chinese entrepreneurs are not confident about future growth in China. How do you view this issue?

Guo: We are very confident about China’s future growth. We expect that China will grow by at least 5% to 7% for the next 10 to 20 years. This is more so after the new round of reforms, including novel measures like the Shanghai free trade zone (STFZ). The benefits of the reforms will be gradual. However, I do not mean to say that China’s economy has no challenges. We will face a lot of challenges in future growth. However, overall, we are very bullish on China’s future.

Confidence in China’s growth doesn’t translate to stopping investment abroad. Fosun can only find better investment targets in global markets if we are doing well in China. But we can only do well in China if we have a global vision.

“The new Shanghai FTZ is another milestone event for China’s reform. It has the same weight as ‘China joins the WTO.’”

If you have only China in your sights and no global vision, you won’t have a clear understanding of China itself. On the other hand, only when you understand China more profoundly can you find the best opportunities in other markets. You can then truly marry China momentum with global resources.

For example, we understand what’s happening and changing in China’s tourism industry. That is why we had both reason and opportunity to invest in Club Med and the Atlantis Hotel project. Because we have global vision, we can understand the next step for China’s tourism industry, and the direction we should go in.

Knowledge@Wharton: Talking about the SFTZ, how will Fosun explore the opportunities that are expected to come from it?

Guo: I personally think that the significance of the SFTZ is not limited to Shanghai alone. This is another milestone event for China’s reform. It has the same weight as “China joins WTO”. It’s also a symbolic event for China’s next round of reform.

At Fosun, we are very confident of being able to avail this opportunity. The establishment of the SFTZ includes three major integrated functions — trade, services and finance. Our global investment focus has been in the services and finance industries. In the future, the SFTZ will give us a better way to integrate our investment with the Chinese economy. This might include introducing in China products and services we have invested in abroad. [These companies may] make their Asian headquarters or even global headquarters in the SFTZ. We will pay great attention to the zone’s development.

Knowledge@Wharton: Cash flow is very important for all companies, particularly those in expansion mode. What is your experience?

Guo: Fosun started as a small company. We are very cautious about capital management. But we are always looking to connect with high-quality capital and the capital markets. High-quality capital brings not only money, but also value-added services, which are very necessary for growth.

We always pay attention to cash flow and liquid assets. We are not only looking for new projects to invest in but also for the right time to exit to obtain healthy returns. This gives us good cash flows and guarantees the next round of investment.

In addition, we design and set up suitable financing structures based on the nature of project. This structure includes bank loans, insurance capital — which prefers long-term and stable returns — and our own funds. We have found that really good projects are never short of money. The not-so-good projects don’t deserve our efforts anyway.

On financing, we always take Warren Buffett as our model. We get better financing channels by investing in banks and insurance companies. In recent years, Fosun has invested in Yongan Insurance Co; formed a joint venture — Pramerica Fosun Life Insurance — with the U.S. Pramerica Financial Group; and set up Peak Reinsurance Company [a joint venture with IFC] in Hong Kong. My vision for the Fosun Group in the next few decades is to become a premium insurance-oriented investment group with a focus on China’s growth momentum.

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