Market analysis: Zhuzhou

23Nov2012

Zhuzhou, in the eastern side of the Hunan province, is the second largest city of Hunan. It’s one of the most important transportation hubs. Attracted by its moderate climate, beautiful scenery and clean environment, more and more immigrants are considering this as a possible place of residence.

Zhuzhou plays a very important role in the birth of Yanhuang culture. This is the main reason why it is well known as a historical and cultural city. However, it is also famous for the Yandi Tomb. In addition, the Iron Rhino, which was built in the Southern Song Dynasty about one thousand years ago, still stands on the MiJiang river.

Zhuzhou is an emerging industrial city which owns Asia’s largest non-ferrous metal smelting base, carbide research and development base and electronic car research and development base.

Zhuzhou also plays a significant role in the development of electronic locomotives in China as it was the birth place of China’s first electronic locomotive. Ever since, the city has committed to perfecting this technology. For example, the six-axis 9600KW electronic locomotives made in Zhuzhou, are the largest power locomotives in the world and has been leading the world almost 20 years. Meanwhile, Zhuzhou also has produced China’s first aero engine, first air-to-air missile and first piece of carbide. All these achievements make Zhuzhou a fertile ground for investment. Nearly 500 companies, including 11 globally renown brands, have chosen to invest in Zhuzhou.

Hunan Taizinai Biological Technology Co., Ltd

Hunan Taizinai Biological Technology Co.,Ltd (Taizinai), a lactobacillus brand of China ,once was the leader in Chinese lactic acid bacteria beverage industry. By observing the ups and downs it experienced while growing, we can learn the typical struggles of young Chinese enterprises. In 1996, Lituchun established the first Taizinai plant in Zhuzhou. This was when China first became a free market economy and the big market was almost untouched. Li recognized and seized this opportunity. In 1997, Li invested 88.88 (8 is a lucky number in China) million RMB in CCTV prime time advertising. This proved to be a very wise decision after a few years. From 2001 to 2007, Taizinai’s sales jumped from 50 million RMB to 30 billion RMB, increasing 60 fold in 6 years. However, more and more companies entered into this industry and starting eating up Taizinai’s market share. When China joined the WTO, foreign companies became a major threat to Taizinai. In order to keep the leading position, Taizinai received $73 million in investments from Actis, Morgan Stanley, Goldman Sachs and venture capital companies.

But the prosperity did not last very long, due to a series of unsuccessful capital operation and internal management issues, Taizinai was trapped in a quagmire. In 2008, Taizinai’s profit fraud was exposed and soon after, its funding strand broke. Inevitably, Taizinai went bankrupt and underwent reorganization proceedings in 2010. In 2011, Xinhualian group working with San Yuan group started restructuring Taizinai.

Excessive expansion and taking on massive debt from investors is very dangerous for new enterprises. Once foreign competitors with superior sources entered the market, Taizinai did not have any competitive advantages over its competitors. The development of Taizinai was a blind expansion process that neglected the trust of its consumer base. Once the market begins to question a company’s ability and trustworthiness, loan and credit will become difficult, and company will meet a particularly hazardous situation, just like Taizinai had faced.

CSR Zhuzhou

Chinese economic reforms have opened up opportunities for many new restructured enterprises. CSR Zhuzhou Electronic Locomotive Co.,Ltd (CSR Zhuzhou) was founded as an indirect result of the famous reform and was established in 2007. Its shares are held by China South Locomotive Co., Ltd. CSR Zhuzhou Electric Locomotive Research Institute Co., Ltd., New Leap Transportation Equipment Investment Leasing Co., Ltd. and Zhuzhou Lince Group Co., Ltd. These companies hold 69.01%, 16.31%, 13.05% and 1.63% respectively.

Zhuzhou has always been famous for its electronic locomotive technology and it has made its number one priority to carry on this advantage. CSR Zhuzhou has two major industries, the electric locomotive industry and the urban rail vehicle industry. The company has produced a total of nearly 5,000 units of various types of electric locomotives, accounting for about 50% of the national railway electric locomotive market placing it on the top of China’s electric locomotive industry. Meanwhile, it has received more than 3,000 rail vehicle orders for 23 projects from Guangzhou, Shanghai, Shenzhen and other cities, the contract amount is a total of nearly 22 billion yuan.

These figures show CSR Zhuzhou is not only successful, but still has a lot of potential. CSR Zhuzhou is one of China’s central enterprises. The Chinese government still adhere to the belief that concentration can make a difference. As a result, a large number of resources are gathered in such central enterprises and preferences are also first given to these enterprises. This management method will produce a series of vulnerabilities, such as rent-seeking. A common phenomenon in China is when the privileged class uses their power to seek benefits for themselves at the cost of damaging the interests of the general public. The Chinese government has tried very hard to eliminate the phenomenon but has had little success. Where there is centralization, there is corruption. According to a non-official report in February 2012, CSR, one of the parent companies of CSR Zhuzhou, bought raw materials at a price that was much higher than the market price that time. This likely means that some of the money reported as the purchase of raw materials, likely went elsewhere.

Daxue Consulting Market Analysis in China

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