Before he started HengAn International Group (HA Group) in 1985, Xu Lianjie was a farmer in the eastern coastal province of Fujian in southern China. HA Group is now the leading Chinese maker of personal and household paper products, including feminine care products, diapers and tissues.
HA Group listed its shares on the Hong Kong Stock Exchange in 1998 and has a market capitalization of more than HK$85billion (US$10.95 billion) today. HA group has built a sales network of 15,000 staff and more than 700,000 retail stores across China, including the far west.
Xu, now 59, hopes to leverage this network to sell non-paper goods including food and other daily health products. His goal is for HA Group to strengthen its position to become the best-known Chinese consumer brand and the strongest rival within China of Procter & Gamble, which Xu says he considers a benchmark.
While most rural enterprises in China come and go, lasting only a handful of years, Jinjiang-based HA Group is an exception. Not only has it survived, it has thrived. Its sales have grown consistently, from RMB 4 billion (US$634 million) in 2005 to an estimated RMB 17 billion (US$2.7 billion) in 2011.
HA Group’s rise can be attributed partly to the feminine care market it now dominates, a market largely unexplored when the company began. But it can also be attributed to Xu’s vision, leadership and management style. In an interview with Knowledge at Wharton, Xu discussed his experiences as an entrepreneur and what’s ahead for HA Group.
Below is an edited transcript of the conversation.
China Knowledge at Wharton: Jinjiang, where HA Group is based, is famous for its apparel industry. Why did you choose paper products?
Xu Lianjie: Back in 1985, when I started this enterprise, there were numerous small apparel manufacturers in Jinjiang. Those factories didn’t have their own brands and were making a little money doing manufacturing. I didn’t know anything about apparel. However, it looked to me that the feminine hygiene product market was unexplored. As long as the products are convenient, clean and comfortable, you will find customers. My choice was based on the simple belief that if you have repeat customers, you will have a market.
If you had asked me to conduct some formal market feasibility study, I might not have [manufactured feminine care products]. There were no relevant materials to make the products in China; 90% of [the materials] needed to be imported. And as a private enterprise, you have to use a foreign exchange quota to buy imported raw materials. [I paid] more than double the price paid by the four state-owned companies [that were competitors at the time]…. But I charged more [for our products], as our quality was better. Although the price was higher, sales were still not bad.
China Knowledge at Wharton: In the beginning, did you have a plan to build a brand?
Xu: Yes. We were planning to build our own brand, “An Le” [which means “safe and happy”]. It’s a good name, easy to read and remember. When our products entered Shanghai, we very soon acquired 70% to 80% market share and made the four state-owned companies almost disappear from the Shanghai market.
[The U.S.-based consumer products giant] Procter & Gamble entered the China market in 1988, with many in the industry saying “the wolf is coming,” as they are really big and we are so small, like elephants and ants. But we took a differentiated approach to positioning our products, catering to mass consumer markets and they are more high-end. We still enjoyed high growth. Around 1992, the feminine care products business was hot in China, and you could easily make money as long as you produced.
But when the time of glory comes, the crisis also comes. When the market is so hot, why would others only watch? At that time, Japan’s Kao and American companies Kimberly-Clark and Johnson & Johnson all entered China. And no fewer than 5,000 domestic companies were producing [similar products to ours]. We sensed danger and devoted all of our resources to transform and upgrade our business. We invested in advanced and expensive equipment to upgrade our capabilities around 1992. The equipment for An Le cost more than RMB 100,000 and the equipment for [the new HA Group brand] “An Er Le” was more than RMB 10 million. Because all ancillary materials needed to be imported, the investment was huge. But I believe our decision to investment at that time was right. Otherwise, we wouldn’t have been able to fight with those thousands of new factories emerging after that time.
China Knowledge at Wharton: Didn’t domestic competitors buy expensive equipment? What made your company stand out?
Xu: Not all of them [bought expensive equipment]. I remember a competitor in Qing Dao [in Shandong Province] and a brand “Shu Er Mei” in northern China and “Weida” in Guangdong Province also invested in equipment. However, the key to winning the competition is products. The products you are going to make will determine what kind of equipment your suppliers will sell you. The next big factors are the sales channel and management efficiency. If you want to maintain healthy growth, you have to be more efficient and get better-quality products than your competitors.
China Knowledge at Wharton: HA Group was very profitable in the mid-1990s. Why did you choose to go public in 1998?
Xu: In 1995, the company’s growth met a bottleneck. Sales lingered around RMB 1 billion and it was very hard to break through that level. There were various issues of corporate governance and management systems. When we planned to go public in 1998, many original shareholders didn’t agree as the company was still highly profitable and they didn’t want to dilute their shares. Some wanted to postpone [going public] for two years.
I said to them, “Time won’t wait for us.” With no transparent operational system in place and with all key executives being relatives, we would not have been able to hire professional talent and develop the company further. There were many disputes, but we eventually did it.
Going public would require more vigorous management systems, no relatives in key management positions, and more transparency on shareholder positions. The purpose of going public in 1998 was to improve our governance structure, rather than financing. We financed HK$700million (US$90 million) through an IPO on the Hong Kong market, and that money was used up only in 2003, for acquisitions.
China Knowledge at Wharton: What kind of professional talent did your company look for?
Xu: As long as an individual was suitable for the position and could do his job well, he was the right talent. I didn’t care what he did before. If you can dedicate yourself, you will soon learn how to do it. I was a farmer at first, and then did some apparel business before I started this feminine care product company, which I knew very little about before.
If you have a good performance evaluation system and management system in place, you will see good performance. If a company doesn’t have good people, the key reason is the performance assessment system is not good, so people are not motivated to do things. So the key to attracting talent is to build up a good internal management system.
China Knowledge at Wharton: After you went public in 1998, what changes did HA Group make?
Xu: After going public, I persuaded many original shareholders, including my own relatives and friends, to quit from management positions. Meanwhile, as a public company, we had a more disciplined financial reporting system.
A tragedy happened in 1999, when the whole family of our deputy general manager was [murdered], and the case was only cracked by 2000 [after a lengthy investigation within the company]. So the company had a vacancy for six months, with no one really managing the business. However, our financial record was not disrupted, and we kept our financial discipline. This can only happen in a public company which enjoys a full set of professional management systems and a transparent operational process. Otherwise, the company will be destroyed by such a horrible murder case.
One thing has been consistent through our entire history: We are always transforming ourselves. From mid-2002, we hired an American consulting firm [the Thomas Group] for RMB 20 million to help us with our governance structure and gradually build up a centralized business management structure. In the old system, each subsidiary was relatively independent and covered all functions, including manufacturing, branding and sales, which made them compete with each other. In the new structure, where we have separated manufacturing and sales, there has to be [agreement].
China Knowledge at Wharton: How did you ensure the implementation of these reforms?
Xu: The system is set up by people and can live only through implementation. Leaders, especially the CEO, have to abide by it. Otherwise the system will only be there in name.
There were many rules set up at that time that still work today. For example, going to entertainment places like karaoke bars has not been allowed for expense reimbursement since 1988.
China Knowledge at Wharton: Why is that?
Xu: We found that activity was dangerous. If going to entertainment places could be reimbursed, employees would be too corrupt. Even our guests were not thinking of going there; employees would suggest it. HA also strictly manages the private use of company cars. You can use it if you pay for it. This is the policy.
There were many original shareholders who were suspicious of our new rules. But if the CEO began to implement them, they would be convinced and the system could be fully executed. As long as the rules are reasonable, transparent and open, there will be no fishy deals.
China Knowledge at Wharton: HA Group has an extensive sales network across China. How do you manage this vast network?
Xu: In 2002, we introduced the “three tables, one chart” approach in the sales channel. It’s a tool to help salespeople build a network of stores, put products on the shelves and make it convenient for consumers. We didn’t understand how to do branding or how to do ads at that time, but we knew how to keep customers in close contact.
“One chart” refers to the strategic map, which sets out the route of stores managed by our salespeople and client managers. We require salespeople to have a map of routes with 30 daily visits to stores. One salesperson will manage 150 to 180 small- to mid-scale stores.
“Three tables” refers to three different formats of tables: the client record table, which records the basic situation of every store; the distribution sample table, which illustrates the sample on the shelf, as every store will have its own standard on samples; and the sales progress table, which records sales every day based on store visits.
We started to use these tools extensively in 2006, and every township has a sample store. Our sales network covered 550,000 stores in China in 2010 and more than 700,000 in 2011, with a sales force of 15,000 [among 35,000 total employees]. We not only evaluate the number of stores we manage, but also the quality of the stores.
To manage such a huge sales force well is one of our core competencies, which some of our competitors really desire. Multinationals in China like P&G and Kimberly-Clark all rely on wholesalers to manage store sales, and they would have a headache managing such a big sales force. However, we did not create this approach. We learned it from Coke and Nestle.
China Knowledge at Wharton: Were there any challenges in managing such a sales team?
Xu: Back in 2006, we planned to reach RMB 10 billion in sales. We realized that we had to greatly strengthen our internal information flow. Otherwise, there was no way to manage a huge sales force across the country.
I estimate that sales will be more than RMB 17 billion (US$2.7 billion) for 2011. We need a system to manage all the information — from strategic decisions to target management, from operation and resources management to the environmental control system, performance evaluation, etc. And we will need to further explore and upgrade the system. The ultimate goal of control and management is to have better planning around human behavior and to standardize daily work. If you are not standardized in your work flow, the more at-risk you will be.
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