Cross-industry pig farming is risky: of 8 companies, 5 are already losing money
Wanda invested 1 billion yuan in pig farming, Goubuli Baozi paired with coffee, LeTV sold hairy crabs, Lenovo grew blueberries, and livestock enterprises ran cemeteries... For most enterprises with strong resources, "not putting all your eggs in one basket" has become the consensus, but when an enterprise's cross-industry "side business" has nothing to do with its main business, will it ultimately help the enterprise make a brilliant transformation, or run it aground? An Lin, chairman of Beijing Qiushi United Management Consulting Co., Ltd., said that at present, the odds of success or failure in cross-industry ventures are 50% each.
Enterprises' cross-industry journeys
2014 was an exceptionally busy year for Alibaba. In addition to successfully listing in the United States, public information shows that within one year Alibaba invested in and acquired no fewer than 30 companies of various types, including not only e-commerce and logistics directly related to Alibaba, but also media, video, transportation and travel, sports and entertainment, online travel, and application software. In particular, Alibaba formed a strategic partnership with Evergrande, investing 1.2 billion yuan for a 50% stake in the Evergrande Football Club.
Some media say that behind the rich player's "neglect of its proper duties" lies a deeper strategic layout: upgrading the traditional e-commerce model, and by acquiring data generated in work, life, and study scenarios beyond users' e-commerce transactions, building a virtual commercial society system, thereby spawning a series of business models and value-added services.
In addition, after mineral water and grain and oil, Evergrande took another step in diversification: Evergrande Dairy Group officially announced that it had acquired New Zealand's Cowala Dairy in September last year. Backed by real estate, Evergrande's various property projects will also join the sales channels for infant formula milk powder, and consumers can pre-order products on site at property sales offices.
There are doubts within the industry about this. Marketing expert Li Zhiqi said in a previous media interview that Evergrande is, after all, operating across industries, and many problems cannot be solved by money alone. The talent teams and market channel development that the fast-moving consumer goods industry values take time, and competition in mineral water among supermarkets, hotels, and convenience stores is already fierce, so it will not be easy for Evergrande to gain share in these areas.
In June 2014, Amazon reached an agreement with the California government under which 55 million US dollars will be gradually injected over five years, focusing mainly on testing various interconnected home hardware. The plan was described as "electronic device research and development."
It is understood that Amazon had already begun testing devices that let "users order products from home with the tap of a button," and will engage in close combat with fellow tech giants Apple and Google in the smart home sector. People familiar with the matter told the media that Amazon's experiment is still only at an early stage, so it is not yet certain whether the final product will come to market, but its entry into the smart home market is inevitable.
In July 2014, Semir Apparel entered the children's education and training market. It signed an "Asset Purchase Agreement" with Hong Kong Ruizhi Group Co., Ltd., purchasing a 70% stake in Yuhan Information Technology Co., Ltd. held by Ruizhi Group. Semir said that in the future the company will continue to carry out investment, acquisitions, and resource integration in children's education, animation and film, games, and other related industries, building the company into a comprehensive one-stop service platform for children.
Industry insiders say that after years of operation, Semir Apparel has successfully run a children's apparel business centered on the Balabala brand and achieved a leading position in China. In its children's business, the company currently has more than 3,500 stores, more than 5 million VIP customer resources, and an e-commerce company with more than 400 full-time employees, with obvious advantages in channels, customers, management capabilities, product development, supply chain resources, and online and offline business. Semir's entry into the children's education and training market, combined with the company's various advantages, to carry out resource integration in China's children's education market will help promote Yuhan's development into a leading children's education enterprise in China.
In September 2014, news emerged that Bill Gates was going to launch the world's thinnest condom. It is reported that Gates has provided 100,000 US dollars in sponsorship to the University of Manchester in the UK to develop condoms using the ultra-light conductive material graphene, and also provided 100,000 US dollars to the University of Oregon in the US, which plans to make condoms using polyurethane with a thickness less than half that of the thinnest condoms currently on the market.
However, while some enterprises have thrived in cross-industry ventures, others have declined, just like the pig farming wave some time ago.
The cross-industry pig farming wave
After investment banks such as Goldman Sachs and Deutsche Bank "enclosed land to raise pigs" in China in 2008, many domestic corporate giants branched into pig farming, including Fosun Group, Lenovo Group, NetEase, Guangzhou's well-known real estate enterprise Merrill Group, and Shunde-listed chemical enterprise Demei Chemical.
Raising pigs, raising chickens, growing vegetables, selling red wine, early childhood education, water and electricity maintenance, car rental... As a leading enterprise in the steel industry, Wuhan Iron and Steel launched a series of attempts in non-steel industries, striving to break out of the current situation of overcapacity in the steel industry.
In 2014, steel prices fell by more than 10%. Although industry profitability improved due to falling iron ore prices, the entire industry still faces sluggish demand. At present, China's crude steel capacity has reached 1.16 billion tons, with overcapacity ranking first among all industries. A reporter did the math: at the current rebar price of about 3,000 yuan per ton, that converts to an average of 3 yuan per kilogram of steel, while pork is already 25 yuan per kilogram, so 1 kilogram of steel is not even worth 150 grams of pork.
The China Iron and Steel Association's supportive attitude toward steel enterprises developing non-steel industries is beyond doubt, and it even demands that this be elevated to a strategic level. "For steel enterprises to develop non-steel industries around their main business and achieve moderate diversification is no longer a partial issue or a tactical issue, but an overall and strategic issue concerning the sustainable development of enterprises," said Zhang Changfu, vice chairman and secretary-general of the China Iron and Steel Association.
It is not only Wuhan Iron and Steel. Under conditions of thin profits or losses in the main business, stepping up efforts in non-steel industries has now become a concerted action among large, medium, and small steel mills across the country - whether in mining resources, mechanical equipment, processing and distribution related to the main steel production business, or in fields less closely related such as real estate investment, financial services, and even green farming.
Although these transformation moves are already urgent, the situation of the enterprises entering the pig farming wave is not good. According to relevant data, among the 8 listed companies involved in large-scale pig breeding and processing businesses, 5 have already suffered business losses, and the rest have also seen sharp declines in performance.
One transforming enterprise told the media that after years of market tempering, it is still somewhat inexperienced in the pig farming industry. Financing costs have increased with market changes, including the advance setting of various rules and clauses. The market's valuation of the pig breeding and processing industry has continued to decline, and the most direct consequence is that the profit space for funds is increasingly narrowing, making the capital chain difficult to sustain.
Wu Xianming, director of the Center for Multinational Enterprise Research at Wuhan University, believes that there are only two reasons for enterprises to operate across industries: first, poor performance in the main business forces transformation; second, good opportunities and funding conditions allow for long-term strategic layout.
"There are more cases of enterprises being forced to diversify and failing, and the losses caused are also greater." Wu Xianming believes that taking the case of steel enterprises raising pigs as an example, due to the crisis of overcapacity, enterprises seek cross-industry development in farming side businesses to get through the development winter, but so far none have improved. Pig market prices fluctuate significantly, and the market has high requirements for a complete industry chain. Even large farms find it difficult to cope with market changes, and small and medium-sized farms find it even harder to gain a firm foothold in the market. When enterprises operate across industries without a relevant business system for pig farming, this kind of "desperate resort to any remedy" will bring greater risks to the enterprise.
Experts: cross-industry ventures are a double-edged sword
Should enterprises go cross-industry or not? How should they do it? This leaves many entrepreneurs deeply conflicted.
Failed cross-industry cases can be found everywhere, and successful cases are not few either. An Lin, chairman of Beijing Qiushi United Management Consulting Co., Ltd., said that the overall situation at present is that the odds of success or failure in cross-industry ventures are 50% each.
"Whether business expansion is relevant is very important, and this can affect the success rate of cross-industry ventures." Professor Wu Xianming said that cross-industry operations are broadly divided into two types: one is relevant diversified cross-industry expansion, and the other is a non-relevant diversified cross-industry route. Some enterprises currently conducting cross-industry operations are taking the non-relevant diversification route. The fields these enterprises cross into are not related to their original industries, and because they are unfamiliar with the fields they cross into, their cross-industry exploration is often full of risk.
Wu Xianming said that some enterprises have unclear main businesses and unclear development strategies, and already have crises themselves. Before the capital chain is about to break, choosing to enter an industry as a "desperate resort to any remedy" will bring even greater risks to the enterprise. The decline of the pig farming wave illustrates this well.
"For enterprises themselves, when the main business encounters difficulties, they must absolutely avoid a 'desperate resort to any remedy' and being forced into diversified cross-industry expansion." He believes that blindly and forcibly choosing an industry to enter across sectors often intensifies competition within the industry and puts the enterprise in a more unfavorable position. Once it fails, it often causes especially large losses. Enterprises should combine their own actual conditions, conduct sufficient investigation and research on the business of the industry field they plan to enter, and cautiously choose their own path of cross-industry development.
"For enterprises to develop across industries, it is best to have the support of related businesses, so that there can be a related business information sharing platform to meet customer needs, and the success rate of cross-industry ventures will be higher." Wu Xianming believes that cross-industry operations can amplify profits and reduce the risk of putting all eggs in one basket, and may gain further development space in the short term.
He also mentioned that if there is sufficiently large capital investment, the recruitment of relevant talent, a not-too-high industry entry threshold, and the seizing of a rare opportunity, non-relevant diversified cross-industry expansion can also succeed. "Therefore, it is not certain that Wanda, with its strong financial power, will fail by investing 1 billion yuan in pig farming."
For enterprises preparing to go cross-industry, Wu Xianming believes that there are currently some industry fields with relatively good development and relatively suitable entry, such as finance and services. They have large development space and ample potential, and their markets can be further tapped. In addition, there are industries with a certain degree of monopoly, regulation, and high entry thresholds; if an enterprise meets the standards and can enter, it can also obtain returns. There are also emerging industries with relatively few participants, which will also have broad development space.
"Enterprises must know themselves and their opponents, seize opportunities, while ensuring sufficient financial support and continuously innovating their own management capabilities, so that they can fight the cross-industry battle with preparation and confidence," Wu Xianming said finally.
(Article source: Changjiang Times)