(Beijing) - Ning Gaoning is not a typical official people usually find in China's mega state-owned companies (SOE), and what he is doing others often found impossible – letting professional managers run SOEs.
While most SOE chiefs rose from the bottom, the 55-year-old Ning has extensive training on economics and management. He has a bachelor's degree in economics from Shandong University and an MBA from the University of Pittsburgh in the United States.
Ning joined state-owned China Resources Group (CR) in 1987. During his 18 years in CR, including five years as its chairman, Ning shifted the group from a major exporter of Chinese products to an investment powerhouse with more than 900 billion yuan in assets.
In 2004, Ning was moved from one of China's most externally oriented SOEs to one that focuses almost entirely on the domestic market: China National Cereal, Oils and Foodstuffs Corp. (COFCO). As chairman, Ning tried to turn COFCO into a modern company by reforming its culture, setting up aggressive Internet strategies and expanding to cover all segments of the food production chain, a move some deem as evidence of the advancement of state power at the cost of the market.
During an exclusive interview on April 26, Ning explained to Caixin his vision of COFCO's production chain, how to run the company's dairy arm and the company's expansion into real estate business. Excerpts of the interview follow.
Caixin: In 2012, COFCO's agricultural subsidiaries, including Mengniu and COFCO Tun River, suffered from declining performance and even losses. Why was this? Are the losses related to your efforts to build a comprehensive production chain?
Ning Gaoning: There are many reasons for the performance losses but they are not related to the production chain. One can't just look at the calendar for the establishment of a business model. Instead, one must judge the model based on the basic law of the development of the business.
The overall production chain COFCO is building has its own issues, such as too fast a rate of expansion, which can't be supported by the rate of development of the overall economy or the capability of the management team. For instance, part of the loss last year on our ketchup product was due to the sluggish market, rising costs in planting and land use, and a cheap selling price, exacerbated by the appreciation of the yuan.
Also take rice for example. Rice isn't something with a very high added value, but it is a staple food of the Chinese people. As a large food company, COFCO has to be in the rice business, and our production capacity is now 1.2 million tons per year. In the course of a few years, COFCO has shifted from just a trading company to a comprehensive company with many businesses started from the scratch. We are now China's largest seller of rice.
Arranging and perfecting the production chain will take time. For COFCO, the challenge of this transformation is significant, especially in terms of business, management and mentality.
China is the most expensive country in the world to build brand awareness because of its large size. New Zealand has 3 million people, and opening three stores will suffice. I just returned from Danone, France's largest milk company, which has only five factories. But for Mengniu, its 31 factories are not yet enough.
COFCO can build up a whole production chain. It just takes time.
Has your rice business made money? Would importing alone make more business sense?
The rice business has not broken even and will continue to make losses. Unlike oil and steel, for which foreign reliance is as high as 57 percent, we cannot rely on imports for grains, and especially grains for eating. One could say that what COFCO is doing is stimulating China's grain production.
Rice, wheat, corn and other agricultural products imported from abroad are indeed much cheaper than those produced domestically, and import restrictions have been liberalized. But right now import volumes are small and imports are mostly designated for feed.
After buying wheat or corn we make bread or noodles or starch or alcohol, and the rest goes to feed to raise our own pigs. This whole production chain is a remodeling process for our business. Every segment has different characteristics, and the most important thing is to understand and grasp the market.
This industry is the same as other industries: development takes time and depends on business models, management teams, market environment and competitors. It takes a decade to make a company thrive in an industry, especially a traditional industry.
Does COFCO have more advantages in areas such as procurement costs?
Not necessarily. The fluctuations in the prices of raw materials are large, 20 to 30 percent annually. Sometimes we spent too much on importing raw materials. In addition to commodity futures trading, we also buy raw materials purchased from farmers. Buying in bulk doesn't necessarily make things cheaper because the government keeps pushing up agricultural prices, and farmers are reluctant to sell.
I don't think COFCO has any advantage in grain trading. Grain is a commodity, and buying a ton or ten tons at the futures price is pretty much the same.
COFCO's so-called cost advantage mainly lies in scale and the market positioning. By controlling the various links of the industrial chain, we push down costs throughout the whole production process, and we can carry out systemic arrangement from raw materials production to energy supply and logistics.
If COFCO has no advantage in the procurement of raw materials, and its management and back-end sales need to be reformed in the medium term, where does COFCO's competitive advantage lie?
COFCO doesn't need to possess the whole production chain, but COFCO does need to have influence or control the whole chain.
I particularly stress the role of technology, science, and research and development in the process. Take corn for example. COFCO wants farmers to plant high-oil corn, high-protein and high-starch corn. COFCO can't farm the land itself, but we can form relationships with farmers through demand. In addition, we have to do the procurement and logistics, the trade and the processing well so that together the entire industrial chain will be stronger and more profitable.
Will COFCO continue to expand?
It's not expansion of more production chains but growing along with the production chain, constantly growing until breaking through the business critical point. This critical point is not only scale, but is related to market positioning, business model and management capability. In crossing this point, COFCO's various product categories will embark on a stage of self-survival and no further losses.
Right now about 60 percent of product categories have passed through this critical point, such as corn, soybeans, wheat, alcohol, cassava and tea. They each still have their challenges, and the business is constantly changing. In reality, they still need constant research and development and constant introduction of new products. If new products don't make up 15 to 20 percent of sales each year, there's a problem.
How long will it take for the remaining 40 percent of product categories to pass this critical point? Once this 40 percent passes the critical point, will you consider a completion of the whole production chain you envisioned?
It's not that simple. Within these categories there may be both good and bad ones. Take pig breeding for example. Right now the business is still losing money, but Japanese investor Mitsubishi chipped in with a very high valuation. We invested a total of only several hundred million yuan (in pig breeding) and they bought 30 percent for several billion yuan, while the business continued to lose money. Can you call them stupid?
In addition, our e-commerce platform Womai.com also makes losses. But investor SAIF Partners came in with a valuation of 500 million yuan and bought a 30 percent stake. Also, China Life bought COFCO Futures at an even higher valuation, reaching several billion yuan, for a 30 percent stake. We gave investors an opportunity. Investors know what the team will be made into in the future.
When will this production chain be complete? By 2014? We don't know because the market is constantly changing, and the company is changing too. The key is whether or not we can achieve the desired synergy on cost or business model through this production chain, and whether we can ultimately bring value to shareholders or consumers.
Right now this value has been reflected, and consumers have seen it first.
The key to the overall production chain is to do it according to our own pace. What balances the key indicators of whether or not the whole production chain succeeds is the synergy it brings. Right now the production synergies between the various COFCO categories are still relatively low. It's different for each category, but I can say only 10 percent on the whole. Mainly the synergy is concentrated more in the upstream and less in the downstream.
What changes has COFCO brought about after you invested in the dairy company Mengniu, which has been troubled by food quality scandals?
Today's Mengniu is different. Shareholders have changed; the board has changed; the system has changed; products have changed; and the operational concept is more in line with the market.
Globally, there are few dairy brands that raise their own cattle on a large scale. Most are based on a farm system or a cooperative system. In China, almost all of the problems with milk have occurred in the breeding process. The processing segment hasn't been a problem because it's totally controlled by the dairy companies. But the breeding segment is still very decentralized. And companies are forced to raise their own cattle, otherwise they won't have a stable supply of quality milk. In reality, even if you raise your own cattle, you won't necessarily be free from problems. Even though all milk from Modern Farming (a Hong Kong-listed company partly owned by Mengniu) goes to supply Mengniu, it makes up less than 10 percent of its demand.
Milk in China today is twice as expensive as similar foreign products. In theory, within the dairy industry value chain, the marketing and branding segment is of the highest value. But this isn't the case in China because no one has integrated the upstream of China's dairy industry, and prices are thus the highest in the source of milk. This isn't in line with global practice.
Even after Mengniu bought Modern Farming, Modern Farming has its own independent accounting, independent operations and independent market. If they set a price internally (between Mengniu and Modern Farming), people will be lazy and there will be no evaluation procedure. Internally there would be endless meetings.
How is COFCO doing at building synergies among its various production chains?
For COFCO to achieve synergy between industries, management must be far-sighted. Ultimately, they must rely on the market-oriented evaluation system to determine prices.
Take Mengniu for example. Mengniu needs to buy a lot of sugar, oil and feed, but we don't internally require Mengniu to purchase these things from other COFCO subsidiaries. Mengniu makes purchases based on market prices and service levels. Shareholders must agree on these market transactions.
COFCO usually has 30 billion to 40 billion yuan to invest annually. What is the investment budget for this year?
Well, 30 billion to 40 billion yuan was the peak period, and this has gradually slowed. The number of industries we invested in are gradually increasing. This year there are more than 50 projects under new construction and last year there were more than 60, including building many industrial parks. Investment in many individual projects reaches several hundreds of millions of yuan.
COFCO now has a specialized investment management team. In reality there are some industries, such as corn, rapeseed, beets, and sugar that are relatively mature and don't require investment. Meanwhile, we have to continue investing in feed, meat and other industries.
While real estate projects make money, they aren't easy to find. Our Joy City commercial mall project is positioned to be stylish and modern, and it has to be in city centers, not in the suburbs.
In 2013, we'll invest probably some 20 billion yuan, mainly concentrated in the food processing and research and development sectors. COFCO is building an R&D center this year. In the future we want COFCO to be an R&D and brand-driven company.
What is the orientation of the relationship between COFCO's non-agricultural sector, such as finance, real estate and other businesses, and its main agricultural business?
We had revenue of more than 200 billion yuan in 2012, and the group had profit of more than 8 billion yuan. Of this, the grain and oil sector accounted for 70 percent of profits and 80 percent of business volume. Real estate accounted for 25 percent of profit, with more than 2 billion yuan.
COFCO reports to the State-owned Assets Supervision and Administration Commission, and our core business is regulated. In the financial services sector, for example, we are locked into only servicing the agricultural industry. COFCO Trust and subsidiary investment banks can also only serve the agricultural industry.
Last year COFCO's financial services sector did well, making 600 or 700 million yuan in profit, which was basically in service to the agricultural industry. The government approved 20 village banks. These small banks fit COFCO's industry positioning very well. For example, breeding, tea leaves, tea factories, corn, etc., can all make use of these small banks.
It's relatively easy to make money in real estate. For example, Beijing's Joy City project has already been profitable and its business volume this year is expected to increase more than 170 percent. Land was cheap for Beijing Joy City, 18,000 yuan per square meter. Now people are offering 100,000 yuan per square meter in the same area. In terms of the investment cycle, Joy City basically relies on bank loans. Banks are particularly fond of lending to Joy City because there is no risk at all.
However, expansion isn't easy for Joy City. There needs to be the right site selection in the central district of a large city. We waited two years for the Shanghai project to get good land.
Looking at the mainland capital market, COFCO Property cannot take any action. It can't issue shares nor inject assets. Thus, COFCO Landmark Commercial Real Estate intends to go through a backdoor listing in Hong Kong, which we expect to happen later this year.
The four largest international grain merchants often use hedging and other financial instruments in procuring bulk agricultural products to reduce costs and risk. Chinese oil and grain companies, however, usually use 5 to 10 percent of their profit for commodity hedging. In 2010, COFCO Holdings lost HK$ 1.9 billion on futures trading. How do you see the futures business?
If COFCO were very capable of using futures, we would be No. 1 in the industry and we wouldn't have to do anything. If COFCO were 1 percent better than others at using futures, it would be terrific.
But COFCO's futures capability is not higher than others. However, the belief that foreign companies are better in using the futures because their dominance in the market are also misperception. They lose money often. This market is too big, and there are too many participants -- farmers, trading companies, managers and so on. They also fluctuate according to the market, good one year and bad the next.
What do you think is the biggest risk in COFCO's development process?
COFCO has become a diversified investment company, so the group itself won't have a major risk. Diversified investment may not fare well in a given period or given stage. But this won't affect the overall situation at COFCO.
At present, COFCO Group has many levels of risk, the biggest of which is doing branding and marketing.