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Lu Guanqiu: entrepreneur with perennial wisdom

In China’s economic reform that started in 1978, a succession of rags-to-riches people came onto the stage, shone for some time and then vanished. Lu Guanqiu is not one of them. Observers call him an entrepreneur with perennial wisdom.
Chairman of the board of Wanxiang Group Corporation, Lu Guanqiu, 60, is today the seventh richest man in China with personal assets worth some ¥8 billion ($1 billion). Since Hu Run (Rupert Hoogewerf) began compiling the China’s Rich List in 1999, Lu has been one of the most stable occupants of the top 10 places on the list.
Wanxiang, based in Zhejiang Province, east China, is Lu’s brainchild. It had its origin in a tractor repair shop he contracted in 1979 and bought later. In the early 1980s the workshop began making universal joints (Wanxiang means “universal” in Chinese), an important aftermarket replacement part, that brought Lu his first pot of money.
In just 25 years, Wanxiang has become China’s third biggest privately owned company and a conglomerate with business interests in automobile parts, logistics, agriculture, chemicals, soft drinks and finance. Wanxiang’s goal is to make a daily profit of ¥10 million by the year 2009.

Core business

In spite of Wanxiang’s phenomenal growth, Lu has insisted that auto parts manufacturing must continue to be its core business. In 2004 Wanxiang sold ¥20.8 billion worth of automobile parts to win it the first place among 100 top manufacturers of auto parts in China for the year. The country’s top five parts manufacturers each had sales exceeding ¥10 billion and following Wanxiang were Hunan Torch Automotive Group, Guangxi Yulin Diesel Machinery Group, Weifang Diesel Engine Plant and Dongfeng-Honda Engine Co., Ltd.
Wanxiang’s flagship enterprise is Wanxiang Qianchao Co., Ltd., itself a conglomerate of 32 subsidiaries. Their main products include universal joints, CV joints, bearings, drive shafts, brakes, shock absorbers, chassis and exhaust systems. More than a dozen of the subsidiaries are located in Xiaoshan of Zhejiang, where Wanxiang Group is headquartered. Wanxiang also has factories in Changchun, Shiyan, Hainan, Wuhu and Liuzhou, all locations close to OEM’s assembly plants. Wanxiang currently is building a factory capable of making one million brakes a year in Xinxiang, central China.
The path of development for Wanxiang has been to manufacture simple parts first, automotive systems later; and to supply the aftermarket first, and OEMs later. On the home market, Wanxiang has since 2001 been supplying automakers with modular subassemblies, in addition to conventional automobile parts. On the overseas market, it continues to supply parts to tier-1 suppliers such as Delphi and Visteon. 
As a management principle, Lu Guanqiu has proposed what he calls “an enterprise group-oriented strategy but an independent accounting system.”
“The core of an enterprise group-oriented strategy is resources sharing,” Lu said. “It stresses the sharing of technologies, a common market, centralized procurement, centralized control of capital and centralized control of investment. But every subsidiary and every specialized plant has an independent accounting system and assumes its own profits and losses.”

Pooling international resources

In 1997 Wanxiang began supplying auto parts to General Motors, the world’s biggest automaker. Wanxiang therefore became the first Chinese auto parts maker to directly supply a multinational automotive giant. Soon afterwards, Ford, Chrysler and Volkswagen became its customers.
To have better access to the overseas market and upgrade its product lines, Wanxiang has been expanding overseas. It has over the years set up, acquired or invested in 18 auto parts companies in North America and Europe and established a sales network covering more than 50 countries and regions. In 1994 it established Wanxiang America Corp. to oversee all its operations in the United States.
In an interview he granted to McKinsey Quarterly last year, Lu Guanqiu said: “The companies we’ve acquired overseas are’t simply acquisitions. It’s really about pooling international resources. We’ll combine whatever resources we can find to become a company that operates on a multinational basis, using the most advanced technology and playing in the key markets of the world.”
 “For instance, we acquired Schiller, Universal Automotive Industries, and Rockford Powertrain, because they have what we lack most: markets, technology and brands. The weakness of these companies is the rising labor costs. But this is where our strength lies. Low-value-added products are usually labor intensive. We can therefore do it in China and finish the high-value-added products overseas.
“So by combining the benefits of these companies, we bring costs down and improve efficiency. This is how we get into the supply chain of GM, Ford, and other major companies and markets successfully. Everyone wins in the process,” Lu said.
After acquiring Universal Automotive Industries, Wanxiang won $20 million worth of orders a year. With investment in Rockford Powertrain and General Bearing Corp., one of the oldest axle manufacturers in the U.S., Wanxiang realized another $80 million worth of businesses a year.

Automobile assembly still a dream

So far Lu Guanqiu has shied away from making automobiles. That does not mean Lu has no interest in this direction. For years he has dreamed of making cars. Wanxiang Research Institute long ago developed a car model on its own, but Lu would not give the green light to launch a carmaking project. “The more I ponder the issue, the greater the difficulty I see of automobile assembly,” he said. “Wanxiang has other things to do and currently we have plenty of money to make and we are in no hurry.”
Late last June Wanxiang became the second largest shareholder of Guangzhou Auto Industry Group (GAIC) by spending ¥140 million to acquire a 3.99 percent equity share of the rapidly expanding company which has formed joint ventures with leading Japanese and Korean automakers. To the speculation of Wanxiang moving into the assembly business, Lu said: “Our purpose is not to get into the assembly business. We invest in GAIC because we see a promising growth of Japanese carmakers in China. As a shareholder, we maybe able to get into the tightly controlled supply chain of Japanese automakers. We also expect high returns from our investment because GAIC has been very profitable.”
But ultimately Lu is going to graduate from making auto parts to making automobiles. “As Wanxiang becomes stronger,” Lu said, “there is a possibility that ultimately GAIC may have some vehicle projects for us.”
Lu said that Wanxiang must realize three pre-requisites before moving into automobile assembly: a strong supporter, adequate capital and government approval. “We may give it a try with ¥10 billion when our revenue reaches ¥100 billion a year,” he said. But more important than capital are human resources. “We may acquire a bankrupt assembly plant overseas,” Lu said. “But we cannot run the company without a management team.”
When asked about Wanxiang’s ultimate goal in business, Lu said the goal for the automobile parts sector is to grow stronger and more profitable. “How big is going to depend on changes on the market,” he said. “If you do’t change while the market changes, you will be in trouble.”

Sense of crisis

Undoubtedly Lu Guanqiu is a successful entrepreneur. But success has not overwhelmed him. “What is success?” he asked. “Success today does not mean success tomorrow. Today you laud me, but tomorrow when I make a big mistake, all my past successes are gone. Success of an enterprise is expressed in numbers. For an enterprise, success means making steady advances.”
Over the years, one thing about Lu has not changed, according to an executive close to him. “He has always had a sense of crisis; he has remained sober-minded and cautious. And he perseveres in everything he undertakes,” the executive said. These qualities may explain why his is a continuing success story.
In 1999 Lu Guanqiu ceded his CEO post to his U.S.-educated son Lu Weiding, who began handling day-to-day operations of the company. But Lu the senior has continued to navigate the Wanxiang ship as chairman of the board. He has the final say on matters of vital importance, according to inside sources. “I exercise control in two areas in Wanxiang. First is development orientation. I would OK a project if it follows the predetermined orientation. Otherwise, discussions are called for. Second, I examine feasibility studies. But I never get involved in the actual studies to avoid getting muddled.”
In the last seven years, of 100 investment proposals submitted by Wanxiang’s Investment Department, rarely one got the green light from Lu the senior, who often vetoes at the eleventh hour a take-over proposal deemed extremely mature by Lu the junior.
Lu Guanqiu has summarized his principle for investment as follows: lines of business that yield huge, sudden profits are off limits; lines of business that everybody can do are off limits; lines of business that Wanxiang is not familiar with are off limits; and lines of business that the government does are off limits.
Said Yao Wenxiang, an analyst of Orient Gaosheng, a consultancy: “Lu Guanqiu’s style in dealing with acquisitions is to examine cost first and earnings second. Cost is predetermined whereas earnings are undetermined. When acquiring cost exceeds what is planned, he gives up without hesitation.”
Whenever a well-known enterprise goes under, Lu would call a meeting of top managers to discuss causes for its demise. This is a habit Lu has developed over the years, according to people close to him.
Modest but always well calculated. That is Lu the successful entrepreneur, who is likely to remain on the China Rich List for a long time to come.

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