Chapter 24 Chinese entrepreneurs should think about big strategies like Li Ka-shing

Business diversification, business globalization, strategically maintaining a sound financial position, and the strategy of "not being the first" are the four "magic weapons" that Li Ka-shing and his "Cheung Kong Group" have been able to develop steadily after experiencing several crises over the years. ".Realize business globalization through acquisitions and achieve diversified operations; strategically maintain a sound financial position, reduce the risk of financial crisis, and maintain sufficient strength while ensuring successful acquisitions; when everything is ready, the "not the first" strategy looks for a better entry Points increase your chances of success.

Since its establishment, "Cheung Kong Group" has continued to consolidate and develop its core business, but when the time is right, it will actively engage in industries that are not related to the core business, such as the establishment of "Cheung Kong Infrastructure", TOM.COM and "Cheung Kong Life Sciences" In many cases, the best entry point is seized through acquisitions, such as the acquisition of "Hutchison", "Hong Kong Electric", "Husky Petroleum" and so on. No matter in terms of geographical breadth or diversity, the group's acquisitions and businesses tend to be less core business related and global, especially after entering the 1990s.The significance behind engaging in or acquiring low-related industries and low-related regional businesses will help the group diversify business risks and regional risks.

Different businesses have different payback periods and have different sensitivities to current economic conditions.Generally, businesses with a short payback period are more sensitive to the current economic situation. The advantage of these businesses is that they can seize the opportunity when the economy is good to obtain richer profits, and the cash flow is relatively continuous, such as retail and hotels.Generally, businesses with a long payback period are less affected by the current economic situation. The benefits of these businesses are stable income, but the capital investment is relatively large, such as infrastructure and electricity.

If a company's business is largely short-payback, profits will fluctuate frequently, fluctuating with current economic conditions.If most of the company's business is a business with a long payback period, the return of funds will be relatively slow, and because the capital investment is relatively large, it is prone to the risk of poor capital turnover.The ideal is to combine businesses with payback periods of various lengths to achieve risk diversification over the payback period.Different businesses of the Changhe Department have different payback periods, ensuring that sufficient funds flow back in each period to fund capital investment in businesses with long payback periods.

In addition to the above two points, the acquisition of stable return business can also reduce the fluctuation of profit, so as to achieve the effect of smooth profit.In addition, the stable return project also has its strategic side.For example, it can provide a stable cash flow, which can help the development of other businesses in the group and can reduce the chance of financial or financial difficulties in the event of difficulties. The stable profit sector has little profit change and growth, which seems unattractive. On the other hand, the volatile sector has great potential for huge profits.However, in times of adversity (years 3-5, 10-12, and 14), it has played a big role, preventing the overall profit from going backwards and resulting in losses, making the annual report look better, and giving shareholders a share Rest assured, the risk of bankruptcy is also greatly reduced.Having a stable and profitable business also makes financial reports and financial ratios more attractive, so it is helpful for borrowing or raising capital.

"Cheung Kong Industrial" diversifies risks through diversification. A prominent case is the reorganization of "Hutchison", "Cheung Kong Infrastructure" and "Hong Kong Electric" in 1997, and re-established a new structure of the group.After the reorganization, the structure is simpler and the holding strategy is more obvious.And we found that this reorganization actually has its risk management strategy side.We try to divide the member companies into two groups: "Cheung Kong" and "Hutchison", "Cheung Kong Infrastructure" and "Hongkong Electric".

Before the reorganization, "Cheung Kong" directly controlled "Cheung Kong Infrastructure". "Cheung Kong" is mainly engaged in real estate construction, and most of its business is in Hong Kong; "Cheung Kong Infrastructure" is engaged in infrastructure construction, with most of its business in Greater China.Both are not low in terms of business types and business regions, and they failed to make good use of our above-mentioned decentralization strategy.Their businesses are similar and unstable. In addition, since 1994, the core business of "Cheung Kong" has regressed, and the similar fluctuations of "Cheung Kong Infrastructure" have made the comprehensive profit more volatile. In fact, through restructuring, "Cheung Kong" Real" reduced its holdings in "Cheung Kong Infrastructure" (from 73% to 42.3%).

On the other hand, "Hutchison" controls "Hongkong Electric". Since "Hutchison" is already a company with diversified businesses and geographical dispersion, its profits are relatively stable, and "Hongkong Electric" is what we mentioned in the third point. A stable and profitable company , so the combination is relatively stable.Because of this, after the reorganization, "Cheung Kong" and "Hutchison" did not significantly reduce their holdings in "Hongkong Electric". Before the reorganization, among the core businesses of "Cheung Kong Infrastructure", the infrastructure business invested in mainland China, such as toll roads and bridges, was a high-risk investment with a long payback period and unstable profits. Although the operating return increased from 970 million Hong Kong dollars in 1996 It reached 1.33 billion Hong Kong dollars in 1999, but then fell all the way down to 519 million Hong Kong dollars in 2001.In contrast, due to the stable demand for electricity in Hong Kong, the return of "Hongkong Electric" has been quite stable, rising from HK$4.475 billion in 1996 to HK$6.715 billion in 2001, rising steadily every year.Furthermore, "Cheung Kong Infrastructure" has strong capital and huge investment. In 1996, the net cash outflow of investment activities reached 3.3 billion Hong Kong dollars, and in 1997 it reached 3.8 billion Hong Kong dollars, while "Hong Kong Electric" had a large net cash inflow.

Combining "Cheung Kong Infrastructure" and "Hong Kong Electric" will achieve the above-mentioned benefits of risk diversification: the nature of the two businesses is relatively low; "Cheung Kong Infrastructure" has a long return period, while "Hong Kong Electric" has already had stable and continuous returns; "Hong Kong Electric" has a smooth profit to achieve a smooth profit effect.In this way, "HK Electric" can provide stable cash flow for "Cheung Kong Infrastructure" and help the development of "Cheung Kong Infrastructure" business.Since the acquisition of "Hongkong Electric" in 1997, "Cheung Kong Infrastructure"'s share of the operating profit of the associated company has increased by HK$1.635 billion compared with 1996, and it has grown steadily every year, greatly increasing the profit of "Cheung Kong Infrastructure".

With the reorganization of "Hongkong Electric", the comprehensive profit of "Cheung Kong Infrastructure" has undergone a decisive change, from regression to growth.Until the end of 2001, "Hong Kong Electric" was still the biggest source of profit for "Cheung Kong Infrastructure". In the first half of 2002, "Hong Kong Electric" still accounted for 52% of "Cheung Kong Infrastructure"'s revenue source.After the acquisition, it had an obvious smoothing effect on the overall return of "Cheung Kong Infrastructure". If "Cheung Kong Infrastructure" has never acquired "Hongkong Electric", the fluctuation range of its pre-tax profit growth can be as high as nearly 1500/0 and as low as -50%.However, through restructuring and combining the performance of "Hongkong Electric", the pre-tax profit growth of "Cheung Kong Infrastructure" can be maintained at a relatively stable level, and there has been no negative growth.

In addition to the benefits of risk management, the restructuring has strategic benefits for "Cheung Kong Infrastructure".For example, improve financing capabilities, use the business expertise of "Hong Kong Electric" to develop new businesses, etc. Since the late 1980s, the entire CKH Group began to enter the overseas market. The overseas business scope includes energy, real estate, telecommunications, retail and container terminals, etc. The investment area is based in Hong Kong and extends to mainland China, North America, Europe and the United States. Rest of Asia Pacific.The Changhe Department is actively pursuing the road of internationalization. In addition to meeting the needs of business scale expansion, the most important thing is to diversify its investment risks through business globalization.Different markets are affected by the economic cycle differently, the degree of industry competition is also different, and the market development stage will be different. Changhe Department uses this geographical difference to increase the flexibility of its investment and reduce the risk it bears. , ensuring that the overall return is always satisfactory. Next, we will use the example of the telecommunications business to explore whether the "globalization" strategy of Changhe's business is as effective as its business "diversification" strategy in terms of diversifying investment risks. "Hutchison"'s telecommunications business is also spread all over the world.At present, "Hutchison" owns and operates telecommunications and Internet infrastructure in Hong Kong, Southeast Asia, the Middle East, Australia, Europe, America and other countries and regions, occupying a leading position in the world market.The range of services it provides includes mobile telephony (voice and data), paging service, trunking communication service, fixed line service, Internet service, fiber optic broadband network and radio broadcasting service, etc. Hutchison's telecommunications business has also benefited a lot from this "business globalization" strategy, which mainly comes from the following three aspects: First of all, due to the very fast upgrading of information technology, many technologies that have been developed or purchased with huge investment may not be eliminated by the market in a short time.If the company's business is only concentrated in one or two markets, the lifespan of these technologies is relatively short, and the period of profit brought by them is also very limited.On the contrary, if the countries and regions in which it operates are relatively diversified, and these markets also have great differences in the development stage and application degree of science and technology, then the company can use this difference to launch technologies and products that adapt to local actual conditions.This means that technologies that have been eliminated in more advanced markets may still have the potential to continue to develop in relatively backward markets.Having multiple different markets enables a company to promote a patented technology in different markets at different times, thereby maximizing its profitable period. "Hutchison" mobile phone business is a prime example.When the growth of its second-generation mobile phone technology GSM in the Hong Kong region and the Australian market has gradually slowed down, "Hutchison" has continued to vigorously promote GSM services in emerging markets such as India and Israel with low mobile phone penetration rates. To meet the growing needs of local users. The growth rate of the number of GSM users in Hong Kong and Australia has declined sharply in the past five years, while the Indian market has risen in a straight line. Since "Hutchison" launched GSM business in India in 1998, the number of users in India has been growing at a relatively fast rate every year.This shows that although the GSM technology in relatively advanced markets has become saturated and will be gradually replaced by the third-generation technology, "Hutchison" does not need to completely withdraw from the GSM technology market, because in relatively late-developing regions such as India, It still has huge market potential.However, if "Hutchison" did not operate mobile phone business in Hong Kong, Australia and India at the same time, I am afraid that GSM technology will be eliminated as its market in Hong Kong becomes saturated.After business globalization, when markets with rapid technology development such as Hong Kong and Australia are gradually preparing to introduce more advanced third-generation mobile phone technology, the second-generation technology can still continue to bring profits to the company. Secondly, after implementing the business "globalization" strategy, the overall risk "Hutchison" bears when launching new products, new technologies or investing in new projects has been reduced.The reason is that the company can use one or two markets as a test base, take the first step, accumulate experience, and prepare for the comprehensive promotion in other markets in the future.Even if the results of the experiment are not satisfactory, the loss is limited to one or two markets and will not affect the overall situation.Moreover, the company can learn lessons in time and adjust the next strategy. In terms of its latest investment project, 3G mobile phone technology, "Hutchison" is trying to determine its future global 3G business strategy through the operating conditions of the first European market.Even in Europe, "Hutchison" did not start in many countries at the same time, but chose to be the first to launch 3G services in the UK.Since the prospect of this business is still not very clear, "Hutchison" is very cautious and decides the launch schedule of 3G in other European countries according to the market reaction in the UK, so as to minimize the risks brought by new investment projects. Third, due to the huge amount of investment involved in the initial stage of the 3G project, and the fact that it is impossible to make profits in the first few years of operation, the profit growth momentum of the entire telecommunications business of "Hutchison" will definitely be affected by it.However, its business "globalization" strategy enables the company to use the profits brought by mature 2G technologies to support the huge initial investment and losses in emerging 3G technologies.Taking 2001 as an example, although the 3G-related business suffered losses (the annual report and the article did not disclose the specific loss figure), but due to the outstanding performance and profit contribution of emerging markets such as India and Israel, the overall telecom business The profit before deduction of interest expenses and tax reached HK$719 million, an increase of 51% over 2000.According to market analysis, the 3G business of "Hutchison" has currently cost about HK$138.8 billion.Therefore, in the intervening years, the support from mature business 2G technology is particularly important.Otherwise, the overall profit of "Hutchison" telecom business will be greatly negatively affected by the 3G expenditure, and its stock price will naturally fall accordingly, which is extremely unfavorable to the company's development prospects.However, after adopting the strategy of "globalization" of business, "Hutchison" can better coordinate the relationship between new projects and existing projects, and can effectively control the development pace of new investment projects, so as to ensure that the overall profit is stable. There will be too much decline due to new projects. The strategic thinking of "Hutchison" telecom business can be summarized as follows: in undeveloped emerging markets, such as India and Argentina, "Hutchison" continues to use 2G technology to bring higher profit growth; in gradually mature markets, such as Hong Kong and Israel are gradually transitioning from 2G to 3G; while countries and regions with advanced technology, such as the United Kingdom and Sweden, are fully committed to developing 3G services.The most important significance of this strategy is to use the profits brought by mature 2G technologies to support the huge initial investment and losses of emerging 3G technologies.Therefore, we can say that this strategy enables different regions to support each other, and can further support the development of 3G by extending the profit period of each technology. "Cheung Kong Group" has always maintained a stable financial position, and the financial status of each subsidiary of the group is better than that of companies in the same industry.It is precisely because of the group's sound financial position that when good investment opportunities come, the group is more capable of grasping them than potential competitors.Facts have also proved that the opportunities seized due to the prudent financial position strategy are all positive for the performance of the group. Since 1977, the debt ratio of "Cheung Kong" has been declining, and has remained at a relatively stable level in recent years, between 0.2 and 0.3.Compared with "Sun Hung Kai" in the same industry, "Cheung Kong" has a lower debt ratio most of the time. As for another member of the group, "Hutchison", its debt ratio has also been maintained at a stable state, ranging from 0.4 to 0.6, which is significantly lower than its peers "Jardine" and "Swire". The debt ratio of "Cheung Kong Infrastructure" ranged from about 0.2 to 0.5 from 1996 to 2001, and its financial status was relatively stable. Compared with its peers "Hehe" and "New World Infrastructure", it was obviously better. From 1996 to 2001, the debt ratio of "Cheung Kong Infrastructure" was basically lower than them every year. Because of their solid financial status, each subsidiary of the group has the ability or better ability than its counterparts to seize the opportunity to complete good deals.We take the example of "Cheung Kong" successfully acquired "Hutchison" in 1979 as evidence: In September 1979, Li Ka-shing successfully acquired 22.4% of "Hutchison" with HK$639 million, becoming the first Chinese to control a British "foreign firm".There are several reasons for its success: First, at that time, "Hutchison" had financial difficulties due to excessive expansion, and only had a current net asset value of 7 million Hong Kong dollars in hand.Furthermore, "HSBC Bank", one of the major shareholders of "Hutchison", wanted to sell its shares in "Hutchison" because it urgently needed cash to acquire "Ocean Millennium Bank of America".The most important thing is that "Cheung Kong" was in good financial condition at that time and had the ability to acquire. The debt ratio of "Cheung Kong" in 1978 was only 0.40. Compared with the debt ratio of "Sun Hung Kai" 0.59 and "Swire" 0.64, both in the real estate industry and in the conglomerate industry, the debt ratio of "Cheung Kong" is even higher. much lower. Therefore, it is the stable financial status of "Cheung Kong Group" that enables it to fully grasp the advantages of the external environment and complete this acquisition. The acquisition of "Hutchison" also brings other benefits to "Cheung Kong". The reason for "Cheung Kong" to acquire "Hutchison" is largely related to the nature of the business of "Hutchison". Hutchison's core businesses include ports and related businesses, real estate and hotels, retail and manufacturing, energy and infrastructure, and telecommunications.According to the 1996 annual report of "Hutchison", although the group's profit from the real estate business decreased by 52% compared with the previous year, the profits of other businesses all increased, which made its annual profit increase by 26%.Since the return of "Hutchison" is relatively stable, the acquisition has an obvious smoothing effect on the overall return of "Cheung Kong".If only the pre-tax profit of "Cheung Kong" is calculated, the fluctuation range of its pre-tax profit growth can be as high as 100% and as low as -80%, and the decline was particularly obvious between 1997 and 1998.However, after combining the performance of "Hutchison", the pre-tax profit growth of "Changshi" can be maintained at a relatively stable level, thereby reducing the group's return risk. "Not being first" is also a way to reduce risk.On the one hand, through the observation of predecessors, mastering the law of changes in things, can judge the results of decision-making more accurately; on the other hand, after waiting for a period of time, the market climate is often clearer.And if you want to launch a new product, it will be easier for consumers to accept it after waiting for a period of time.Although this gives up the opportunity to seize the market first, it is sometimes worthwhile because it can reduce many risks. "Not being the first" can also be achieved by acquiring companies that are already engaged in a certain business, which can also avoid the huge investment in the early stage. Although Cheung Kong's "not being the first" strategy avoids the initial high risk, if the timing is not good, it is easy to enter the high-risk area or bear the consequences of many investors joining the competition later.Therefore, the strategy of "not being the first" is also a difficult art to choose the investment time. Various investments in the history of "Cheung Kong Enterprises" have been used a lot by "not being the first".Next, let's use the investment of "Cheung Kong Enterprises" in the telecommunications industry to analyze its "not the first" strategy. "Hutchison" launched Telepoint's telecommunications service in the UK in May 1992, named "Rabbit".This is actually the last Telepoint service provider in the UK. Phonepoint first launched the service in September 1989, and then three others launched one after another, all of them closed down in 1991.Apparently, Hutchison didn't think their failure would be repeated on Rabbit.However, "Rabbit" also closed down in December 1993 due to incompatibility between technology, products and the market. Vodafone launched the GSM network service in the UK in 1991, and by the end of 1994, its customers had reached 1 million. BT Cellnet (now 02) launched GSM network business in the UK in 1994, and One2one entered the UK market in 1993, and Orange was the last one. However, Orange grew rapidly. The number of British customers rose from 3 million in 1994 to 10 million in 1997, and reached 35 million in 1999, with an annual growth rate of more than 60%.During the same period, the number of Vodafone's UK customers rose from 10 million in 1994 to 30 million in 1997, and to 50 million in 1999, an annual growth rate of less than 40%. Orange went public in 1996, becoming the youngest company to enter the FTSE-100, and in 1998 became the best performing stock in the FTSE-100.It can be said that it took Vodafone 8 years to develop, but Orange achieved it in just 4 years. Changhe's strategy of "not being the first" also extends to Ding's 3G strategy: after Japan's NTT DOCOMO launched 2.5G "i-mode" in Japan in 1999, "Hutchison" has continuously strengthened its cooperation with NTT DOCOMO to Its experience has prepared itself for the launch of 3G, and today, more than a year after NLIT DOCOMO launched 3G, "Hutchison" is still in preparation, which shows its "cautiousness".In the investment of 3G, the investment strategy of "not being the first" will also effectively reduce the risk of the group and contribute to the success of the overall investment.