March 28, 2014 1:00 pm JST

Wahaha is a drinks giant in China, but CEO Zong thirsts for more

TORU SUGAWARA, Nikkei staff writer

BEIJING -- Zong Qinghou, chairman and CEO of the Hangzhou Wahaha Group, envisions an even more diversified and globalized future for the sprawling beverages empire he has built over three decades. In a recent interview with The Nikkei, Zong, one of the richest men in China, laid out his ambitious agenda, including expansion into new businesses and overseas markets, backed by the company's huge cash reserves.

     On the subject of economic reform, Zong was optimistic about changes at state-owned companies but argued that more resources should go to the private sector. He also called for allowing to take control of their state-owned counterparts.

Q: What is Wahaha's diversification strategy?

A: Diversification has been a key management challenge for Wahaha. I used to believe that diversification was vital for companies. I thought a company should enter a new promising area if its current business was in bad shape. I thought that is the way for a company to ensure sustained growth.

     But there are companies that have fallen into trouble after recklessly expanding the scope of their businesses. Some people say diversification is not necessarily good for companies.

     My current view is that companies should diversify, while carefully assessing demand and business opportunities in new markets and their own abilities. Wahaha is a large player in the beverages market (in China). But it could have adverse effects on the industry if it were to simply create price competition and pursue expansion. We need to seek stable growth.

     We have a large amount of surplus funds to finance our diversification. While our core business has been production and sales of drinks, we have expanded our operations upstream into the materials business and downstream into distribution. The area we currently see as most promising is health food. Demand for health food in China is bound to grow as Chinese people live longer, on average, year after year.

Q: What specific plans do you have to enter the health food market?

A: We are considering establishing a research institute for the study of bacteria and yeast. Fermentation technology can be used to develop healthy food products. We also plan to pour resources into livestock farming to produce raw milk, a key ingredient in dairy products.

     We are also interested in high-tech industries as well. We have already launched a business selling energy-efficient power generators. We are considering expansion into robotics and environment-related markets, too.

Q: What about your overseas operations?

A: We are currently looking for partners. I have visited several countries and examined local markets myself. This is the best time for us to acquire technologies and hire well-qualified people. Foreign companies that are potential partners want us to invest in their countries. It is important for us to work hand in hand with such partners so that both can grow.

Q: Which countries have you researched, exactly?

A: The U.K. and Canada. We studied the machinery and electric appliance industries.

Q: What are your thoughts about reform of state-owned enterprises in China?

A: It is good that state-owned enterprises go public after making reforms, and it is also good that private-sector companies take part in the management of state-owned enterprises. I once said that state-owned capital by nature belongs to the people. Allowing all employees at state-owned enterprises to own shares in the company would enhance their motivation.

     Sinopec has decided to open up its refining and marketing operations to private-sector investors. But Sinopec has capped the amount of outside investment at 30%. Unless they are allowed to take management control, private-sector companies will end up simply providing funds to state-owned enterprises through such investments. I have the feeling that state-owned companies are cannibalizing profits from private-sector businesses. Distribution of resources should be left to the market.

Q: What is your assessment of China's corporate tax code?

A: Some local governments still try to raise corporate taxes when they face a revenue shortfall. Chinese small and medium-size companies have to bear a heavy tax burden. The situation for us is better because we have grown. The government claims it increases its tax receipts in order to raise people's incomes, but companies are facing a steady increase in costs. In the real economy, value lies in wealth creation. If companies cannot grow because of a heavy tax burden, the real economy could be seriously affected.

Q: There is talk in China of raising the retirement age. What do you think of the idea?

A: If the population of a developing country shrinks, there will be a shortage of funds to finance the country's pension and other social security programs. Proponents of the idea say China should respond to the aging of its population by raising the retirement age, but I think it is still too early to take such a step. They say the government's one-child policy has led to a decline in the working population. But is that really so? In rural areas, each family still has three to four children on average. There is still a huge pool of labor in China. Raising the retirement age now would only make the job crunch among young people worse.

Q: You have said imported baby formula should not be banned from China despite reports of quality problems. Why?

A: China doesn't have ample dairy resources, but its market for baby formula is large. There are rich dairy resources overseas, but insufficient demand for baby formula. Chinese companies should expand into other countries to take advantage of these resources. This way, we can deal with the problem of a shortage of resources at home. A total ban on imports of baby formula would cause a serious shortage in the domestic supply and drive up prices.

     The key to solving this problem is improving the quality of quarantine inspections, whether for products made in China by foreign companies or imports. It is possible for Chinese companies to create brands for dairy products overseas and market them as foreign-made. Still, the quality could be poor or no better than domestic products. It is important to improve the system to verify the quality of such products. A total ban on imports would not solve the problem.

Q: President Xi Jinping's government is staging a large-scale anti-corruption campaign. How do you think this will affect relations between government and businesses?

A: I personally believe businesspeople should understand politics but should not take part in it. The government, for its part, should understand businesses and help them become financially independent. That's enough for us. The relationship between Wahaha and the government can be described as not so bad.

Q: In recent years, there has been a lot of talk in the Chinese business community about the difficulty of hiring high-quality people. What is your view?

A: There is no recruitment problem for Wahaha at all. I hear that it is difficult to hire people in coastal areas. That's a structural problem. Young people today are reluctant to take a taxing job or a low-paid one. Wahaha's wages are relatively high, and we don't have any difficulty hiring people. But an increase in the tax burden on companies would inevitably reduce our profits and make us more likely to fall into the red. That would make it impossible for companies to raise wages.