Photography: Getty Images The Idea: Western executives may complain that their organizations are bureaucratic, inbred, or risk averse, but few companies display these attributes as vividly as the ones controlled by the Chinese state. Here’s how a fledgling CEO instituted reform. In 1995 I was the assistant managing director of Tsingtao’s first brewery, and we’d had a very good year. To celebrate, I took our employees on an outing to Laoshan, a beautiful mountain near the plant, for a day of hiking. While climbing the mountain, I received a message on my pager from my boss: “Get back now.” I rushed to the office, where I was told that Tsingtao’s management had decided to give me a new assignment. They wanted me to go to Xi’an, more than 800 miles away, to run the Hans Brewery. I was to start the new job in three days. Tsingtao had just acquired Hans, and the deal wasn’t working out very well. On my first day at Hans, I found a financial statement lying on my desk that said, “Daily production: 1,000.” At first I thought this meant 1,000 cases of beer, which wasn’t bad. But when I met with the staff, I learned that it meant 1,000 bottles. This was a company that employed more than 1,000 people—so it was producing less than one bottle of beer per employee per day. My stint at Hans began with this moment of great disbelief. At the time, that kind of underperformance wasn’t unusual in Chinese businesses. Until China began its economic reforms, in 1978, most companies were state owned. The government determined production plans; few managers paid attention to customer needs or traditional marketing. The tracking of metrics such as costs, productivity, and efficiency was rudimentary. There was no mechanism for consumer feedback, so managers didn’t know (and didn’t really care) what customers thought. Some of the practices that Western businesses take for granted, such as holding employees to high standards of performance, didn’t apply. By the early 1990s many state-owned enterprises had improved their productivity in response to aggressive market competition from Western brands, which were popular with consumers, but Hans still had far to go. I set out to revolutionize its culture over the next five years to effectively compete with private enterprises—and when I became president of all of Tsingtao, in 2001, I tried to expand those practices to the entire company. Customers Are My Boss I was born in 1956 in a shabby rented room. My parents were orphans with limited financial resources. Growing up in such a family, I was under tremendous pressure. According to Chinese tradition, because I was the eldest son, I would be expected to support my parents when I grew up. That made me focus on working hard from an early age. I remember one morning I watched my mother preparing fermented flour so that she could make steamed buns when she returned home from work. In order to give her a surprise, I ran home immediately after school and steamed the buns myself—something very unusual for a boy my age. When my mother came in and saw what I’d done, she was so excited that she ran all the way back to her factory with buns in her hand to show off to her colleagues what a great son she had. I’ll never forget the joy on her face. I’m still that boy today. Whatever I do, I always try to give people a pleasant surprise, and I always try to take care of my team or my company as if it were my family. When I arrived at Hans, I couldn’t understand why it was failing so miserably. As a state-owned enterprise, it had capital and technologies at its disposal. It should have been able to use them to compete against Yellow River Beer, which was privately owned, and Baoji Beer, a township enterprise. What had gone wrong? At state-owned enterprises, a person’s success depends on how well he pleases his superiors, not how well he meets consumers’ preferences. The biggest culprit, I learned, was the brewery’s local leadership. At state-owned enterprises, managers are appointed because of their connections to the Communist Party—they don’t need to work hard or perform to achieve promotions. In a culture like that, a person’s success is determined by how well he pleases his superiors, not how well he meets consumers’ preferences. As a result, Hans managers spent most of their time knocking on the doors of their bosses and trying to make a favorable impression, and very little time paying attention to the local beer market. My first job was to change that attitude. I’ve always been a hard-core believer in the concept that customers are my boss. As beer men, we need to get out in the market and gain a firsthand feel for it. I began going to restaurants and food stands after work, sitting and talking to people about beer. When they left, I would count the number of empty bottles on their tables and take note of the brands. I talked to restaurant owners and asked the ones who didn’t carry Hans why it wasn’t on the menu. I encouraged my salespeople to gather this kind of information as well, by giving each of them a three-yuan daily beer allowance. By dining and drinking with ordinary Xi’an citizens, we came to understand how they perceived our brand. It turned out that local beer drinkers had a saying: “Hans is bitter, Yellow River is light, and Baoji has lots of sediment.” None of the beers was perfect, so I decided that we should aim to be not bitter, not as light as Yellow River, and sediment free. From those evenings I also learned how much the Xi’an people like spicy food, such as hot pot and barbecue. Lighter beers pair better with that cuisine, so I decided to reduce the alcohol content in Hans from 12% to 10%. Finally, because of their spicy diet, people preferred chilled beer, but most beer distributors delivered the product warm and left restaurants to chill it themselves. I decided that we would turn an empty hop house into a large refrigerator and begin chilling our beer at the brewery. China didn’t have refrigerated trucks in those days, so we arranged for a fleet of three-wheeled carts to transport the beer, covered with thick quilts, to every customer. Our carts became known around the city. Those changes worked. When I arrived in Xi’an, Hans was losing 25 million yuan a year. At the end of our first year we had earned 10 million yuan. Over the next few years our market share surged, and by 1999 we had reached our target: profits of 50 million yuan a year. Hans had become Tsingtao’s most profitable brewery, and our profits offset the losses incurred by many of its other local breweries. Meanwhile, production had gone from 1,000 bottles a day to 790,000. Pancake M&A In 2001 Peng Zuoyi, the president of Tsingtao, died from a heart attack while swimming. I considered myself the best candidate to replace him, but at least 11 other candidates held higher positions in the company. The board conducted a companywide secret-ballot survey of managers, asking “Who’s the best candidate for CEO?” I received more than 70% of the votes. When I was told the results, I felt a burst of happiness and gratitude. I also felt the weight of the responsibility. My wife didn’t want me to accept the job, out of concern that overwork might threaten my health. But I had spent 25 years at Tsingtao, and I owed all my talents to the company. It was facing a life-or-death situation, and I felt I must step forward. The company had wildly overexpanded during the late 1990s. In 1993 Tsingtao had done an IPO on the Hong Kong Stock Exchange, becoming the first-ever Chinese company to be listed there. Afterward the government was still its biggest shareholder, but we now had private shareholders as well, and they expected good returns. My predecessor had felt compelled to do something strategic with the money we’d raised, and the capital markets had exerted great pressure on him to expand. Within a few years Tsingtao owned 47 local breweries. At the peak of its expansion spree it bought two breweries in one week. In its M&A decisions Tsingtao had focused too much on the capacity of potential acquisitions and not enough on market demand. The belief was that acquiring breweries would provide easy access to new markets, but that wasn’t necessarily true. Just as I had in Xi’an, I worked to persuade managers to look closely at the markets. Tsingtao needed to make decisions—including those about production capacity—with an eye toward what consumers wanted, not simply on how much it could produce. In 2002 we acquired only two more breweries. I shut down several others. The economics of keeping them open just didn’t make sense. I tried to explain my approach to M&A to employees by using a street vendor as a simple metaphor. There was a woman near our headquarters who cooked two dishes: pancakes and steamed buns. She used the same dough for both. For pancakes she stretched it light and thin to cover as much area as possible. For steamed buns she kept it thick. Before I became president, Tsingtao had been making pancakes—trying to cover many regions but without depth or meaningful market share. I wanted to make steamed buns—to have a more substantial presence in fewer areas. Consider how we went about doing this in Wenzhou, one of the most developed cities in China. In 2004 Tsingtao had only one distributor there, with annual sales of 2,000 kiloliters (about 528,000 gallons). We set up an office in Wenzhou to manage distributors and expand the market. Then we divided the region into four territories and put each in the hands of one distributor. Actively managing our efforts in the region, instead of simply signing up a distributor and leaving the rest to him, made our sales soar: We sold 4.08 million kiloliters in 2005, 4.54 million in 2006, and 5.91 million in 2009. A Team of Wolves I used a different metaphor to communicate our shift from a government-run company to a business that serves consumers. In the era of the planned economy, companies had been like dogs—the government was the owner, and it would determine what and how much we ate. Our job had been to watch over state-owned assets, and we could expect a warm meal if we obeyed orders. In the market economy we had to fight for our meals—like wolves. Wolves survive by fierce competition: In their bloody fights, the winner commands the highest respect. Having worked for a state-owned enterprise, our people weren’t used to competing for jobs or to being replaced for a subpar performance. In my first six months as president I replaced seven of the eight general managers who were running big departments at Tsingtao and more than 20 general managers at our breweries. Many of these people had been supervisors or colleagues of mine. To be honest, I found the firing process extremely difficult. When you’re at a company for a long time, you know everyone. But I believed that the market should rule, and that only those who performed well should be able to stay. I stuck to that belief. I needed to create a team of wolves who wanted to compete. Some of the changes we made may sound basic, but in a traditional Chinese company they were innovative. For instance, until 2002 Tsingtao didn’t have an HR function, so we implemented one. We began tracking our talent, actively recruiting, and focusing on retention. We worked harder to find the right people for the right jobs. We also revised our incentive systems. Salespeople were given clearer targets, and the compensation system was set to reward them for meeting goals. Finally, our leaders became role models for the cultural change. In Xi’an, I had emphasized that we needed to be customer oriented, and I had modeled that by going out every evening to eat barbecue with common citizens. As the leader of Tsingtao, I continued to emphasize that employees should spend time listening to customers. Slowly this value seeped into the culture. Over time Tsingtao began to adapt to being market driven. It prospered, just as Hans had. As the changes took root, I altered my leadership style. A 2002 joint venture we formed with Anheuser-Busch was one reason for that. During the negotiations I had asked that we establish a system of knowledge transfer so that Tsingtao could learn Anheuser’s best practices. We exchanged personnel, and I spent two weeks every year shadowing Anheuser’s CEO. I went to board meetings and management reviews and learned the company’s decision-making process. It was a revelation. To my amazement, Anheuser-Busch executives worked according to strict plans. Appointments, meetings, and visits were highly organized. The CEO would not touch on any specific matters and rarely attended events without prior arrangement. He simply looked into strategy and left the day-to-day business to other people. That is not how a Chinese CEO manages. Chinese CEOs spend half their day signing papers. Watching Anheuser-Busch work gave me a lot of inspiration. I began to understand that a company cannot base its success on the competence of several high-performing leaders. It must develop a system that generates success by itself. A company cannot base its success on the competence of a few leaders. The system itself must generate success. I began to build this system at Tsingtao. My cell phone became a test of its effectiveness. If the phone didn’t ring for a long time when I was out of the office, I knew the system was working. In 2008 I became the chairman of Tsingtao. Even before that ascension, I had begun to think of my evolving role in terms of soccer positions: I was becoming less of a forward, who’s the key to the offense and is involved in most plays, and more of a goalkeeper, who serves a protective function while other players act as the aggressors. The cultural shift at Tsingtao has produced strong financial returns. In 2001 our share price was roughly 10 yuan. It rose as high as 47 yuan before the global financial crisis and is now in the low 30s. In February 2010 Reuters reported that the company was the fifth largest beer seller in the world; that year we sold 6.35 million kiloliters of beer and had revenues of 19.9 billion yuan. In the first half of 2011 revenue and profits grew by more than 20% over the prior year. My ultimate objective is to build within Tsingtao Brewery a platform on which everything runs so smoothly that my presence or absence will have no bearing whatsoever on the business. I hope that when I leave, my successor will retain this system so that the company can survive and grow on its own, no matter who serves as CEO.
