GIVE THEM HOPE
Cheap labor doesn't equal profits for those investing in China. Creating audacious goals does.
By Carla Rapoport

Mike Cronin's life looked as grim as a squashed persimmon in 1999. After six years of pouring his energies into Asimco, a direct investment vehicle with a controlling stake in 17 auto component companies spread across China, Cronin was staring at another year of losses. The CFO knew that with each new manager he hired to help sort out the problems, another new culture would arrive. Morale throughout the group was not just at a low ebb, it was hopelessly fractured between 17 different operations.

Things got so bad that a movie he saw about Stalingrad, one of World War II's bloodiest battles, struck home. The movie, Enemy at the Gates, depicts Russia's darkest hour. Faced with desertion, generals mull ways to give soldiers incentive to stay. One urges shooting deserters - or their families - but the young Nikita Kruschev rejects it. Instead, he growls: "Give 'em hope." The Russians, of course, carry the day. Cronin carried the idea back to Asimco..

Cold Cash

If you are wondering how a fuzzy concept like hope can turn a rag-tag collection of former state-owned enterprises into a profit machine, drive out to Langfang Meilian Brake Company. It's about an hour east of Beijing and if you make the trip during winter, be sure to bring a warm coat. You'll find that the factory is spotless, but there's no heat. A board outside the factory's air compressor unit shows why.

There, big red columns of numbers tell the unit's story. Number of employees - down by 20 percent. Levels of inventory down, material costs (including heat) down, net output per employee up, and average pay up from 648 to 1,150 renmimbi (US$139) per month. The average salary in the area of Langfang is 800 renminbi (US$97) per month. Inside, using a PowerPoint presentation, jacket zipped up to his neck, Langfang Meilian's deputy general manager Liu Guangjun reports that after losing US$4 million in 1999, the plant made a healthy profit on sales of US$24 million last year. He gives two reasons for the improvement: "Good teamwork and our performance management system."

Cronin, an Englishman with a background in consultancy and venture capital, watches Liu's presentation with the pride of a general. "Give them hope - at its most basic, it means tying performance to pay," he says. But it's also about tying corporate goals to employees' goals. Today, as China's largest independent auto parts maker, with sales to global heavyweights such as Fiat, Bosch, Honeywell and Caterpillar, Asimco is safely back to profitability. It is also chasing ever bigger goals. With sales of US$175 million last year, the direct investment company, owned equally by GE Pension Trust, Trust Company of the West, and its top managers, expects to go public within the next few years. Sales are growing at 20 percent, exports at 50 percent.

From Cronin's night at the movies to the Asimco of today, however, was no easy trip. Investing in factories in China is simple these days - there's no shortage of sellers. But investing in people is a whole other ball game, one which requires every skill you ever learned and then some. But the need for this investment is paramount to achieving any kind of success in China. Post China's accession to WTO, the competition for good talent on the mainland is getting scorching hot. According to a recent survey by Deloitte Touche Tohmatsu (DTT) and CFO Asia of nearly 700 CFOs worldwide, 70 percent of those already invested in China believe recruiting and retaining suitable employees will be more difficult because of increased competition. In DTT's China WTO Fitness report, based on the survey, it warns: "Whatever the talent needs of a particular company, its competitors will want the same type of staff."

Indeed, managing talent in any market is a dicey game. According to a recent survey by Watson Wyatt, the international consultancy, "people and cultural issues" are the most common failure factors in mergers and acquisitions. More than 50 percent of all acquisitions studied by Watson Wyatt reported a drop in productivity in four to eight months, with 58 percent of mergers failing to create substantial returns to shareholders. In China, the figure is much higher.

Frogs In A Well

Asimco's Cronin lived, breathed and ate these statistics in the years between 1996 and 1999. In those years, he and a small group of top managers were trying to stitch together the 17 auto component joint ventures that made up Asimco. Fortunately, the group only bought into companies where it could take outright control. Unfortunately, having control and using it are two very different things in China. "Our managers would say: 'You don't understand China.' We would say: 'You don't understand the rest of the world,'" he recalls.

The troubles between Asimco headquarters and its factory managers boiled down to some basic issues that never varied, from Harbin in the north to Guangzhou down south. First, Asimco's Chinese partners' interests were not aligned with their parent. "They were interested in full employment and sourcing parts locally. We wanted the best suppliers and low employment," says Cronin. These managers, usually lifetime state-owned enterprise employees, were expert at getting in raw materials and labor and were impervious to quality concerns. Accounts receivable piled high, pricing rarely reflected costs - the only thing that mattered was output.

As Cronin puts it: "Our partners' priorities were not ours." Each manager, he says, was like a frog in a well, looking up at a small piece of blue sky, unable to see storm clouds on the horizon. And in the head office, everyone could see those clouds. None of Asimco's top managers, however, had operating experience. They all had financial backgrounds.

Asimco's first attempt to solve the problem - hiring in foreigners with auto industry experience - was a total failure. "The foreigners worried about the size of their offices and whether their Audi had a foreign engine. Their wives couldn't find Marmite in the local supermarket. It didn't work," says Cronin. "We fired them." Next, they tried to train the Chinese managers who were then running each business. That failed as well. "Can't teach an old dog new tricks," Cronin says.

In 1997, Asimco started again, with its New China Manager program, hiring younger employees with experience at global companies such as Alcoa, American Standard, General Electric and General Motors. This brought good news - these younger managers looked out from the top of the well and understood the big picture. But it also brought a new kind of trouble - Asimco now had 17 different cultures and 50 new managers. "We had all these cultures but no moral compass," he says.

Hairy Goals

In 1999, with losses mounting, Cronin decided Asimco needed to seek more training. He hired Hewitt Associates, the human resources consultants. Hewitt immediately told Cronin that training was only part of the solution. Asimco needed a common culture. Even though the company was leaking red ink, Cronin approved the cost of a program to find a common goal. The company spent six months exploring a series of questions - why do people stay at Asimco? What defines Asimco? What is the company's core purpose?

At the end of the process, Cronin had something concrete on paper. The company's core purpose was to create a truly global company, combining the best of China with the best from the rest of the world. Then, Cronin decided to set what management gurus call the B-HAG, standing for Big Hairy Audacious Goal - more than 50 percent of sales to global customers within three years. The next step was to tie everyone's interests to these goals.

To this end, Cronin set up a bonus scheme tied to performance goals, the very performance management system Liu referred to in his PowerPoint presentation at Langfang. Based on a modified concept of economic value added (EVA), the system rewards value creation. He measures value each year as EBITDA times a market multiple, plus net cash. The bonus is calculated as a percentage of the yearly increase in value.

The system, he says, took a lot of time to set up, but it's worth it. "What you get is people managing themselves," says Cronin. Last year's bonus pool was equal to 7 percent of profits, with some managers receiving as much as 1 million renminbi (US$121,000) on top of their wages. Since the program was launched, Cronin has added on to the original EVA formula, putting in new goals for improving working capital days, ratio of sales to fixed assets, and headcount reduction. Managers were given several days of training to learn these concepts, show why they mattered and how to improve performance. Good managers won promotions. Within a year, losses were turning to profits.

"It's not an exaggeration to say we saved the future of the company through promotion and career development," says Cronin. For confirmation, stop one of the managers in the Beijing headquarters. Susan Cao, quality manager, puts it this way: "If your company makes profits, you earn more money." And less chance she'll desert.

Carla Rapoport is managing editor of CFO Asia.