Fixing a sluggish company

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.

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. But when I met with the staff, I learned that it meant 1,000 bottles.

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. 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, but Hans still had far to go. I set out to revolutionise 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.

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?

The biggest culprit was the brewery’s local leadership. At state-owned enterprises, managers are appointed because of their connections to the Communist Party. As a result, Hans managers spent most of their time knocking on the doors of their bosses and trying to make a favourable 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. So I began going to restaurants and food stands after work, and talking to people about beer. I also 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.” 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. Lighter beers pair better with that cuisine, so I decided to reduce the alcohol content in Hans from 12 to 10%. Finally, 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 carts to transport the beer to every customer.

Those changes worked. When I arrived in Xi’an, Hans was losing 25 million yuan ($4 million) 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.

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.

The company had wildly overexpanded during the late 1990s. In 1993 Tsingtao had done an initial public offering 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.

In its mergers and acquisitions 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. I worked to persuade managers to look closely at the markets. Tsingtao needed to make decisions with an eye toward what consumers wanted. In 2002 we acquired only two more breweries. I shut down several others. The economics of keeping them open just didn’t make sense.

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. It was a revelation.

To my amazement, Anheuser-Busch executives worked according to strict plans. The CEO 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. 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.

I began to build this system at Tsingtao. My cellphone 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. 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 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.

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.

Jin Zhiguo is the chairman of Tsingtao Brewery.