Shanghai ZPMC, the world’s biggest maker of container cranes, move from profit to loss; ZPMC reached the limits to fast growth

October 21, 2013 3:33 pm

Crane maker’s move from profit to loss

By Olaf Plötner and Wang Xuyi

The story. Shanghai Zhenhua Heavy Industries (also known as ZPMC), the world’s biggest maker of container cranes, was founded in 1992 by the charismatic Guan Tongxian. By 2001, ZPMC had listed in Shanghai and was the global leader in a market traditionally dominated by European, North American and Japanese companies. In 2008 its market share was estimated at more than 70 per cent, and profits were above the industry norm. But by 2012 revenues were falling and the company was experiencing operating losses of Rmb1.3bn. What had gone wrong?The strategy

ZPMC won customers after realising that established suppliers charged high prices for even the simplest spare parts. Its response was to make similar versions to sell at a lower price. It was helped in this by cost advantages such as the relatively low wages in China. ZPMC generated significant profits, which it invested in research and development that allowed it to improve quality and to innovate.

In 2004, it manufactured the first double crane. This enabled two containers to be moved and unloaded at the same time, which almost halved the time needed for loading and unloading ships.

Unlike its rivals, ZPMC made the final assembly in its home factory before transporting finished cranes to the customer’s port using a specially converted coal carrier.

As soon as Mr Guan thought ZPMC could produce all important components itself, the company offered life-long guarantees on all parts, a business model that was unique in its sector. It also offered to cover, for free, all maintenance and repair during a crane’s lifetime.

Encouraged by strong sales, ZPMC invested heavily in people and property and greatly diversified its product range by entering new areas such as offshore platforms for oil and gas, specialist shipbuilding, offshore wind farms and building bridges.

What happened

ZPMC was especially badly affected by the global recession in 2008, for a number of reasons:

● ZPMC had overestimated its ability to establish itself in new sectors. For instance, mastering the technology involved in building an oil platform took a long time despite its core expertise.

● It assumed its very fast rate of growth would continue and expanded its fixed costs correspondingly. Similarly, it opened up in new locations and hired more people. At its main factory alone, it increased employee capacity to 30,000 when salary costs were also rising fast. Increasing fixed costs is risky because it is hard to reduce them if revenues decline.

● Without the growth rates ZPMC had taken for granted, its innovative model of including after-sales service in the price became a problem. Repair and maintenance was now a cost burden, while the same services were generating profits for competitors.

● In 2010, Mr Guan, now 77, retired to be replaced by a leader selected by politicians, since government institutions had remained the main shareholders. It was hard for the new leader to win the same employee and customer-acceptance as the founder. ZPMC had misjudged the consequences of leadership change.

The lessons

First, the capacity for Chinese companies to improve quality and undertake innovation cannot be underestimated.

Conversely, they should not overestimate their potential for lasting success. Once they are big enough to operate in global markets, the challenges they face will closely resemble those confronting mature western counterparts.

Chinese companies expanding fast globally need to recognise that there are limits to easy growth; ways to overcome such hurdles involve better planning of strategic development, controlling costs, and dealing with questions of leadership.

The authors are, respectively, dean of executive education at ESMT European School of Management and Technology and PwC chair of accounting, Tongji University Shanghai

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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