March 19th, 2014
Via CEIBS, an interesting report on Edward Zhu, founder and CEO of CHIC Group, who some consider to be China’s own Warren Buffett:
In 1995, he gave up a luxurious lifestyle as a San Francisco-based investment executive with an annual salary of US$500,000, because he was ‘forced’ to return to China due to investors’ passionate encouragement. Beginning with a simple Shanghai-based investment firm, from 1995 to 2010, he saw his ROA exceed by an amazing 100% annually using renegade investment strategies such as zero-debt growth and no-cost acquisitions. After building up an empire investing in mainly in China-based B2B enterprises, today, he plans to expand into B2C and to go global through international brand acquisitions.
If anyone can make these ambitious dreams come to reality, it is China’s home-grown investment guru, CHIC Group CEO Edward Zhu (EMBA 2006/DIMP 1999). Today, his vast investment empire spans across industries, from foods, agri-tech, home and garden, medical, and logistics to supply chain management and execution. In his off-hours, Zhu is an avid student of Zen Buddhism and is committed to using his status and financial resources support worthy causes. Following in the footsteps of Warren Buffett and Bill Gates, he plans to donate much of his wealth back to society. Read on as Edward Zhu shares his unique professional and personal philosophies with TheLINK.
For viewers of the CHIC Group’s soon-to-open new headquarters in the Jiading District of Shanghai, the first clue into the management philosophy of the CHIC Group comes as you enter the 9-acre corporate compound, is the peaceful green environment created by lawns, trees and manmade streams. Everything you see — from the gleaming office buildings and the slick R&D center, to the light and modern staff apartments, cozy coffee bars, and glistening gymnasium compound (complete with swimming pool, tennis and basketball courts) — was designed by top international architectural firm SWA Group, the designers of choice for the headquarters of such clients as Google, 3COM, Cisco, eBay, and Dow. Clearly, CHIC Group seeks to impress.
In fact, the group has invested US$70 million its cutting-edge headquarters, set to open in late 2011. While the Group now boasts an impressive size — employing 12,000 staff in 19 branches and 7 factories — the new headquarters represents the first significant investment in fixed assets since its launch in 1995. One of CHIC’s central business strategies has been a “ight fixed assets” model. CHIC Group CEO Edward Zhu explains: “From a financial perspective, assets are the enemy of enterprise. When assets are minimised, ROA (Return on Assets) and EVA (Economic Value Added) are high.” He attributes this strategy as one of the reasons why the CHIC Group has achieved an astounding track record of 100% ROA annually over the past 15 years. In China, ROAs of 30-40% are considered satisfactory (In the US or just 10% in the US, many American investors have been shocked by CHIC’s financial reports. Zhu jokes, “I’ve been very popular — investors always ask me if I need more money”.
Another of the Group’s guiding principles is the ‘Golden Touch’ rule, stating that: “It is to make money without spending money.” This rule of thumb tells why the company shuns paying big bucks for acquisitions. Zhu explains, “For years, CHIC has been conducting acquisitions for little money. Looking at the past decade, if you compare what we have achieved versus what we have spent on acquisitions, it is negligible.” Like ‘Investment God’ Warren Buffett, Zhu believes companies should focus on creating shareholder value by achieving maximum return for minimum investment. “We support SMEs with high potential. This is model – low cost, high potential — is far more profitable than acquiring large enterprises. Zhu steers clear of enterprises with high profit margins but requiring large-scale investment in order to grow.
Through CHIC’s “Investment plus Incubator” business model, its specialized supply chain solution, and continuous technological and management innovations, the Group has developed six main divisions: foods, agri-tech, home and garden, medical, logistics, and supply chain management and execution. In addition, leveraging its position as China’s largest fruit processor, in 2006 CHIC launched its own cafe chain: Brix12. Today, the Group is branching into B2C by entering the global dessert industry and developing a “farm-to-table”supply chain “including land, agriculture and orchards, food processing, food trading and catering.”
In a generous, four-hour interview in March, Zhu passionately outlined his ambitious blueprint for the next decade to TheLINK readers, including his current focus on acquiring international brands. In line with this goal, CHIC plans to acquire well known (and listed) Singaporean juice bar chain Sun & Moon this June and is eyeing four US or European juice companies. In 2012, the company will begin acquisitions in Australia and Japan. Meanwhile, China-based operations will focus on R&D. Says Zhu: “We will use the CHIC’s management, technologies, R&D, product innovation, service innovation and business model innovation to help our newly acquired brands to leap forward internationally.”
If success stories always involve an element of luck and chance, the CHIC story has a fair bit of both. As Zhu tells it, his unplanned move from the US to China originated from a humble unexpected phone call. In March 1994, Zhu was Vice-CEO for a Sino-American Investment and Development Company in San Francisco and earning half-a-million dollars per year. Returning to China was far from his mind. “It was a dream job for a young Chinese man who just entered American society for three years,”says Zhu. “Suddenly, I received a phone call – some investment bankers and angel investors suggested that I develop my career in China. Initially, I declined, but I started to reconsider later. It took me three months to make up my mind. If I failed, the opportunity cost was huge.”
In the end, the China-based investors won out. “Now when I look back, I think those investors had long-term vision,” says Zhu. “They saw opportunities I would not have seen back then. Since then, I have learned to pursue self realization while also securing profit for my shareholders.”
A frank chat with Edward Zhu reveals a rare mix of qualities – a strong entrepreneurial spirit plus the drive to pursue maximum value coupled with a fierce sense of social responsibility. Looking ahead, Zhu announces that he will follow the examples of Warren Buffett and Bill Gates by giving his wealth back to society. “Perhaps nobody believes that I, such a profit-driven person, strongly believe in Buddhism and Zen. From a Buddhist point of view, the world is a vacuum into which things enter and exit. When we use our social status and wealth to do good, we eventually become like Buddha. We help ourselves cross the river and then help others cross over,” he says. One of the ways he has helped fellow students to “cross over” is by providing corporate sponsorship to CEIBS. “Since our time is limited, I pursue efficiency while doing good. For example, I support CEIBS. CEIBS is educating the best elite managers in China. As CEIBS is doing good, my goodness is magnified.”
On February 25, 2010, BRIX 12 restaurant, donated by the CHIC Group, launched its official opening at CEIBS. CEIBS President Zhu Xiaoming greatly praised the innovative way the CHIC Group displayed in its donation. Dean of CEIBS John Quelch said gladly,”Zhu not only donated scholarship to CEIBS, but also is employing his industrial experience to upgrade CEIBS’ service quality. This is a very genreous and much-awaited gift.
TheLINK: Can you explain CHIC’s unique business model?
Edward Zhu: First, we provide solutions for the complete supply chain in the industries we cover.
Second, we are an investment development company – a mix between PEs or risk investors and simple incubators. We are cautious in each investment move into a new industry because we take root long-term. We expand the business then either sell it, get it listed, or hold it. In the past 10-plus years, we have invested in many companies, then sold for handsome returns, but we will continue to hold CHIC Foods.
Third, we provide management expertise, focusing on the management system and the human resource output. The most valuable part of CHIC may just be its human resources!
Fourth, we pursue Innovation. This includes not only product innovation, but also service and business model innovations. Innovation gives us differentiation through added value.
Last, we produce services. We satisfy the needs of our clients and the clients of our clients. For example, one of our big US clients has over 45% of the market share, so we have to pay attention to the needs of the client’s clients, such as Wal-Mart.
TheLINK: What is CHIC’s “Economic Value Added” (EVA) corporate culture?
Zhu: To grow well, Chinese enterprises must develop EVA in their business operations. Many huge US corporations, including Coca Cola, have been using EVA for years but CHIC may be the first to adopt EVA in China. We are adopting it as a financial indicator, as well as our corporate culture. For 10-plus years, CHIC employees have been working with EVA every day because their bonuses are linked to EVA.
What are the criteria for correct decision-making across an entire enterprise? Who should evaluate each employee? The boss? Impossible. EVA is the tool for evaluating the performance of each employee. We use it to keep every employee and every aspect of the company aligned.
We also use EVA as a philosophy for our investment, acquisitions, and global operations. It helps us to reduce capital investment through innovation and technological contribution. Many Chinese enterprises emphasize increase of sales in their global acquisitions, which is a mistake. For an enterprise, it is more important to be powerful than to be huge. One of the strongholds we must fortify is annual growth through EVA — creating value for shareholders.
TheLINK: How does CHIC conduct its “acquisitions for free”? Can CHIC still perform its “zero-capital-investment” miracle when it goes global?
Zhu: For the past decade, we spent nearly nothing in acquiring domestic companies. Instead, we mainly obtained shares through technology contribution. In 1999, Hunan CHIC Food Co President Ms Yang Guoxiu offered to give 51% of the company’s equity to CHIC. At the time, canned foods had become a sunset industry in which 200 competitors nationwide – now there are only 20 — fought to the death for meager profits. Yang Guoxiu (APM 2006) was visionary enough to support CHIC’s plastic packaging technology. Hunan CHIC Food Co grew by 30 times its previous size and becomes now the largest fruit processing companies in China. Yang herself is a billionaire and a Member of the National People’s Congress.
The importance of entrepreneurs like Yang can never be exaggerated. We normally hold 51-60% of a company’s shares, leaving the management of the local company in their hands. If we hold 100% of shares, we must take over management, which is a huge challenge since you face the complicated relationships with local governments, banks, and farmers.
When we make acquisitions internationally, we will use the same model of contributing mainly through technology. Relying on capital investments alone is risky and the rates of return are usually low. Instead, we offer revolutionary technology. For example, after eight years of research, we developed a new technology that extends the sell-by date of freshly cut fruit for up to 12 months. With this innovation, we can buy brands more easily; if they can make US$10 million today, they can make US$100 million tomorrow. Although their shares may be diluted to 49%, they make a lot.
TheLINK: What setbacks has CHIC suffered?
Zhu: We’ve spent 10 long years and invested more than RMB100 million on agricultural experiments, and 80% of them failed. This was a very painful process of probing.
It was only last year that we found our ultimate breakthrough: “urban-rural coordination.” The bottleneck for CHIC Foods has always been the high cost of land and of building plantations. Also, we need extra investment for research into precision agriculture and food safety. So, high fixed costs, plus research expenses, plus the uncertainties agricultural production such as natural disasters, all add up to huge operational risks for fruit production.
Another problem in China is the incompatible duality of rural and urban economies. Many of Chinese villages are now “hollowed out” because the young generation migrates to the city. The government is anxious to reduce the gap between rural and urban areas, and increase the wealth of farmers.
Let me explain Ecological Integrated Rural-Urbanization concept: After three years of negotiation, the Jiangjin District of Chongqing approved an Ecological Integrated Rural-Urbanization program in May 2010, making CHIC responsible for general planning and development. In the program, Step One is to reclaim rural housing sites and develop intensive agriculture. Part of the rural workforce receives technology training to become farm owners commanding 8-115 acres of land, rather than the current plot of around 1/5 of an acre. Only in this way can China’s traditional plow-based farming be upgraded to intensive farming.
Step Two is to train other workforce for secondary and tertiary industries, as part of urbanization. In addition to government policies providing farmers with housing, insurance, health care, and education, this new combination of training for rural or urban skills can be developed. This training can help farmers shake off their crippling dependence on subsidies.
In developing the project, CHIC further seeks to incorporate low-carbon, resource saving, and environmentally friendly principles. We seek to create a model for global development that can be copied elsewhere.
The capacity of the whole program reaches up to tens of billions of yuan, creating jobs and related business opportunities for other industries. This is the new blue ocean for CHIC’s next 40 to 50 years of development, as there are not many companies that truly understand this. Ecological Integrated Rural-Urbanization is our new cause.
“Urban-Rural Coordination” Concept-Irvine Model
Ecological Integrated Rural-Urbanization Concept
Edward Zhu’s concept for an ‘Ecological Integrated Rural-Urbanization’ now being pilot-tested in Western China originated from an unlikely spot: Irvine, California. This idyllic 50,000-acre farming area located between San Francisco and Los Angeles is widely considered as one of America’s most livable cities. Irvine has attracted 350,000 people to settle, giving a strong impetus to the local economy and employment.
The birth of Irvine began in 1860 when agricultural entrepreneur James Owen bought 300,000 acres of land to dedicate to improving agricultural practices. In 1960, the Owen family donated 1,000 acres of land to the University of California, transforming Irvine from a sleepy farm town to an academic hub attracting scientists, educators, and investors. Today, Irvine offers a unique blend of city and country living — the original “Ecological Integrated Rural-Urbanization” that CHIC seeks to bring to China.
Irvine’s amenities include a modern, attractive city center, famous education institutes, cutting-edge agricultural facilities, and a picturesque marina and golf courses set against and rolling mountains. In its 40-year lifespan, Irvine has transformed in that the percentage of farmland has declined while industry has flourished, especially in high tech, design, R&D, entertainment and lifestyle businesses. Many residents who were relatively low-income farmers have become prosperous farm owners, industry workers, and service-providers. Irvine’s unique Ecological Integrated Rural-Urbanization has made it the site of choice for many U.S. companies including Verizon Wireless and Parker Hannifin.
Can the Irvine model be transported to China? If Edward Zhu gets his way, this will happen soon. He says the CHIC Group’s Chongqing project, commissioned by the city’s Jiangjin District Government, has an 80% resemblance to Irvine. The project also incorporates the designs of world renowned construction and design firm SWA– which designed 60% of Irvine’s projects. Zhu plans to make the Chongqing Ecological Integrated Rural-Urbanization project serve as a model for other Chinese cities solving the current city-countryside gap. Says Zhu: “Chinese cities are growing farther and farther away from nature. This is very unhealthy. In the future, people in coastal cities, such as Shanghai, will seek a new Ecological Integrated Rural-Urbanization.”
In establishing the Chongqing project, Zhu plans to borrow directly from Irvine. “We want to invite the University of California to set up a comprehensive university here, offering agricultural science and business management academic programs,” says Zhu. “These programs will train scientists, technicians, and agriculture-related business managers. Modern agriculture practices are only empty talk if talent training cannot keep pace.”
It took more than 40 years for Irvine to develop into the Ecological Integrated Rural-Urbanization offered today. In Chongqing, Zhu plans to develop China’s first such project in 20 years.
Name: Edward Zhu
(EMBA 2006 / DIMP 1999) Title: CEO of CHIC Group
Hobbies: reading, golf, and tennis Role model: Warren Buffett
Career Development:1992-1994 General manager of ATF Cargo International Ltd., USA
1993-1995 Vice President of Sino-American Investment & Development Co., San Francisco.1996-1999 Managing Director of Dr. Martens Airwair (China), successfully launching the fashion shoe brand in China.
1995 Founded CHIC Logistics Ltd.,
1997 Founded CHIC Group
2011 The CHIC Group has a staff of 12,000 in 19 companies and 7 factories worldwide.
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Educated at Yale University (Bachelor of Arts - History) and Harvard (Master in Public Policy - International Development), Monty Simus has lived, worked, and traveled in more than forty countries spanning Africa, China, western Europe, the Middle East, South America, and Southeast & Central Asia, and his personal interests comprise economic development, policy, investment, technology, natural resources, and the environment, with a particular focus on globalization’s impact upon these subject areas. Monty writes about frontier investment markets at www.wildcatsandblacksheep.com and geopolitical pressures in the global agricultural sector at www.seedsofarevolution.com.