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December 30, 2018 - January 2, 2019
It is also a “city without memory”. It is a place where you always ask where someone is from, because nobody is from Shenzhen.
However, in 1980, Shi took and passed the recruitment examination for the Department of Foreign Trade and Economic Cooperation of Guangdong Province. This would turn out to be the move that would change everything for him. For Guangdong, just across the border from Hong Kong, was about to become the first part of China to open to the world.
But the story of Vanke is one we will see again and again in this book: an entrepreneur was in the right place at the right time, caught one of the six mega-trends and then rocketed upwards at astonishing speeds.
Today, at 65, Shi remains Chairman of China Vanke and is one of China’s most famous businessmen. He is also a philanthropist and a noted environmentalist. And he is a particularly well-known mountain-climbing enthusiast, having conquered the highest peaks of all seven continents.
We have argued that China Vanke’s meteoric rise followed from catching the urbanization mega-trend.
The secret to Vanke’s success was cost-efficiency and speed. While many developers focused on building landmark real estate projects or on projects with out-sized financial returns (say, 100 percent), China Vanke focused on speed.
Shi has said he focused on projects with 25% returns and would drop any project over 40%. This reflects a core concept of Vanke’s operating strategy: expediting turnover while driving trading volume, even if it means passing on higher return projects.
Vanke has a business model it calls “5-9-8-6.” Start construction within five months of land purchase. Kick-off sales in the ninth month. Achieve 80% of the target in the first month. And sell out 60% once the project has opened up for sales. This enables the company to retrieve cash faster than its competit...
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We argue that their focus on speed, turnover and covering a large network of cities enabled them to ride the urbanization wave more effectively than others. They also chose to focus exclusively on real estate. Early-on, they sold 10 other promising ...
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CHINA IS A SERIES OF CLUSTERS, NOT A CONTINENT
China has more than 20 of these clusters (shown below), and each of these clusters is about the size of a European country.
China produces 80 percent of the world’s air-conditioners, 90 percent of the world’s personal computers, 75 percent of the world’s solar panels, 70 percent of the world’s cell phones, and 63 percent of the world’s shoes.
Over the next 15 years, Asia will go from 20 percent to 66 percent of the world’s middle class.
China keeps a herd of 450 million pigs, about half of the global pig population.
Capitalism requires capital. And China’s unique financial system is now moving huge amounts of capital around very quickly.
Ask a question like “who controls the Bank of China?” This should be a simple question to answer. Bank of China is, after all, publicly traded. It is certainly run like a banking corporation. And we know who the managers and shareholders are. However, it turns out the CEO does not really report to the shareholders and is not actually appointed by them. He is chosen by the Organization Department of the Communist Party, which technically owns nothing.
Chinese financial services is where high finance, state capitalism, and one-party rule all coincide in a great churning mass. Think realpolitik meets really big money. Or what would happen if the Soviet Union and Wall Street had a baby.
The first is the leadership style of Peter Ma and how he integrated a deeply Chinese organization with Western financial expertise. Even today, Ping An is a traditional Chinese bureaucracy. Across the company, there is the daily ritual of singing the company song and bowing to team leaders before their speeches in the morning.
Peter was arguably one of the most aggressive Chinese CEOs in terms of engaging Western partners and expertise. There are two bronze statues in front of Ping An’s university, one of Confucius and the other of Einstein – symbolizing the mix of Chinese and Western expertise.
This also gives these banks a sort of multiple personality disorder. At certain times, they act mostly like commercial banks. Loans are made by loan officers based on economic criteria. At other times, they act like government officials. Loans are made based on government considerations and with less concern for financial viability.
But it is the magnitude of Chinese shadow banking that should catch your attention. Fitch ratings estimated that the WMP market was worth over $2.3 trillion at the end of 2012. And assets under management in trusts had reached $1.03 trillion. This was around one-third of Chinese GDP.
There are risks everywhere. Not just to investors but also to the entire financial system. And there is the feeling that nobody really knows what is going on.
A key question Chinese graduate students and professionals working abroad often face is “are you going back to China?” In China, they are referred to as “sea turtles”, after animals that return home after a long journey.
As soon as the subject of Chinese brainpower comes up, someone inevitably makes a comment about Chinese being good “rote learners” but Westerners are more creative. This is mostly wishful thinking, with a bit of racial stereotyping thrown in.
What we are seeing a lot of in China is second-generation innovation, often called cost innovation.
Chinese companies have been exceptionally good at making incremental improvements to existing products - and at making them cheaper and cheaper. In their book Run of The Red Queen, authors Michael Murphree and Dan Breznitz write that, “China is a wonderful example of how you don’t need to have novel product innovation to be innovative.”
Our point is that cost innovation is the first real manifestation of Chinese brainpower. Breznitz and Murphree write, “China’s accomplishment has been to master the art of thriving in second-generation innovation—including the mixing of established technologies and products in order to come up with new solutions.”
Chinese children often start their formal education at age two. Having tutors and taking extra classes on Saturdays is the norm. Becoming fluent in English is a given. And math and science skills are all far better than in the West. Right up until entering college, the whole system is very effective at developing valuable skills.
Warren Buffett’s partner Charlie Munger may have described this phenomenon the best when he said, “I think they have been lucky that the Communist Party in China evolved into a Confucian meritocracy where everyone’s been to engineering school.”
