*The following is an excerpt from the One Hour China Book, for which a new 2017 version is available here. In Part 1, we laid out the early history of China Vanke founder Wang Shi. Following a string of successful deals in 1980’s boomtown Shenzhen, he made his first entry into real estate in 1988. This was the move that would change everything.
(continued from Part 1)
“That changed in November 1988 when Shi participated in a land auction for the first time. He made an astonishingly high bid for the “Vuitton Villa” land plot in Shenzhen. His bid was so high it surprised everyone, including the auction officer. But it got him into the real estate game. And with his first real estate project acquired, his company began to transform from a trading house (called the “Modern Educational Equipment Exhibit Center”) into a real estate developer.
From there, his rise was meteoric. The massive migration of Chinese into cities – as well as the movement of current urban residents into nicer apartments – created a huge demand for modern residential housing. In 1991, just three years after its first real estate deal, China Vanke went public on the Shenzhen Stock Exchange. It was the second company to list on the new exchange.
As mentioned, China Vanke focused on basic residential units for the middle class. And they turned them out in great numbers. China Vanke quickly became the largest residential real estate developer in China, with operating income and net profits growing annually at approximately 30 percent and 35 percent.
In 2015, China Vanke’s annual sales exceeded 260 billion renminbi (US$38 billion). Its total sales area reached 20 million square meters. And Vanke’s business covered 55 Chinese cities, with its national market share at 3%. It is dominant in China’s mega-clusters of the Pearl River Delta, the Yangtze River Delta and the Bohai Rim Economic Circle. Today, China Vanke is the world’s largest real estate company, employing approximately 16,000 employees in 28 locations.
However, all of this success has now had an interesting development. As of this writing in 2016, Vanke is fighting against China’s first major takeover battle. Financial speculators, Chinese red chips and other real estate players are all in the mix. Vanke’s success, its listed status and the low shareholding of Wang Shi himself has put the company in play.
But the story of Vanke is one we will see again and again in this book: an entrepreneur was in the right place at the right time, caught one of the six mega-trends and then rocketed upwards at astonishing speeds.
Today, at 65, Shi is one of China’s most famous businessmen. He is also a philanthropist and a noted environmentalist. And he is a particularly well-known mountain-climbing enthusiast, having conquered the highest peaks of all seven continents.
The Secret of His Success
We have argued that China Vanke’s meteoric rise followed from catching the urbanization mega-trend. That means being in the right place at the right time – which 1988 Shenzhen absolutely was. However, they were certainly not the only ones there doing real estate. So how did they become number one?
The secret to Vanke’s success was cost-efficiency and speed. While many developers focused on building landmark real estate projects or on projects with outsized financial returns (say, 100 percent), China Vanke focused on speed. Shi has said he focused on projects with 25% returns and would drop any project over 40%. This reflects a core concept of Vanke’s operating strategy: expediting turnover while driving trading volume, even if it means passing on higher return projects.
Vanke has a business model it calls “5-9-8-6.” Start construction within five months of land purchase. Kick-off sales in the ninth month. Achieve 80% of the target in the first month. And sell out 60% once the project has opened up for sales. This enables the company to retrieve cash faster than its competitors. It can then re-invest to acquire more land for construction and development.
We argue that their focus on speed, turnover and covering a large network of cities enabled them to ride the urbanization wave more effectively than others. They also chose to focus exclusively on real estate. Early-on, they sold 10 other promising businesses so they could focus entirely on residential real estate.”
The above is from our book – the One Hour China Book. It is available here.
I write and speak about Chinese consumers and digital China.
Photo BY Jeff