Four Transformation Phases – The Wanda Way

Four
Transformation
Phases

21 April, 2015 – A speech at the China Green Companies Summit

On 21 April 2015, Mr. Wang Jianlin spoke at the China Green Companies Summit. His speech focused on Wanda Group’s fourth transformation. The following is a record of his speech:

The word “transformation” is popular right now, but the truth is, the issue of structural adjustment of industries has already been brought up over a decade ago at the 13th plenary session of the 6th Central Committee. It has also been a perpetual theme in the development of enterprises. It is impossible for any kind of enterprise and any form of business model to remain the same and not be eliminated eventually. Of the top 500 companies 30 years ago, less than 20% remain among today’s top 500 companies. Perhaps in another 20 years, only a few of that 20% will remain. Hence, enterprises have to adapt to change, proactively change, and be adept at changing. Our main topic today is the transformation of Wanda Group.

I. The four transformations of Wanda

The first transformation occurred in 1993, when Wanda turned from a locally oriented enterprise into a country-wide enterprise. We stepped out from Dalian and expanded to Guangzhou, which was China’s favored place for reforms. There was a popular saying at that time, “north, south, east, west and central (zhong). To find riches, go to Guangdong.” It was a big step for us and took much courage. But with the experiences that came with that step, Wanda expanded nationwide on a large scale in 1998.

The second transformation was in the year 2000, when focus shifted from residential properties to commercial properties. There was instability in residential properties, with cash flow present only where projects existed; once projects were completed, cash flow stopped. Furthermore, judging by global trends, in every country, the city formation process takes about half a century. Once the urbanization process is completed, the property development industry shrinks. After taking into consideration prospects for continued stable growth, Wanda decided to shift its focus to commercial property.

A third transformation took place in 2006. Instead of specializing on just the property business, Wanda took on a composite business scope covering commercial property and cultural tourism, and which revolved around immovable assets. This transformation made us change our paradigms, talent structure and management. In the past, the management of Wanda was mostly made up of people from the field of construction. After changing our business scope, Wanda attracted talents from the tourism industry and cultural fields.

The fourth transformation was implemented in 2014. This time, it consisted of two parts: In terms of space, Wanda turned from a domestic enterprise into a multinational one; in terms of business content, Wanda changed from a real estate based enterprise into a service-based one, with operations in four main industries: Commercial property, culture, finance, and departmental stores. Wanda’s fourth transformation was an intense one and involved profound changes. It differs fundamentally from the three previous transformations. Firstly, the nature of the enterprise underwent fundamental changes. Wanda remained focused on real estate throughout previous transformations, but this time, the focus shifted to services instead. Secondly, the strategic targets are different. Rather than just aiming to become a leader in China, Wanda looks to become a world-class multinational company.

II. Rationale behind the fourth transformation

1. Gaining greater competitiveness

In the past, some have likened Wanda’s involvement in commercial property to the construction of a city moat. In this sense, Wanda’s fourth transformation would be akin to “widening and deepening the moat” to increase competitiveness. Wanda has now taken the top spot in China in terms of immovable assets. The company opened 26 malls this year, increasing the property area held by five million square meters, while other players in the industry typically open no more than two malls in a year. In 2015, Wanda’s total property area held reached 25 million square meters, and Wanda became the enterprise with the largest total leasable property space in the world. Since Wanda implemented the asset-light business model, the growth rate of its malls increased by multiples. By 2020, the total business real estate held or managed by Wanda will be comparable to the total held by the world’s top holders of immovable assets. Wanda is set to at least eliminate competition within China.

Why did Wanda use the asset-light strategy? Wanda’s heavy assets weren’t doing badly – Wanda invests in itself, collects all rent and enjoys property capital appreciation. However, heavy assets are debt-heavy and cannot be developed quickly enough. Wanda has developed 109 malls, a large number for an enterprise, but far from adequate considering China’s market of 1.4 billion people. To gain a greater edge, we have to penetrate third- and fourth-tier cities where others dare not venture, spreading through cities of all sizes in China and taking control of all physical commercial space. Wanda’s strategy of expanding into other industries like culture, tourism, sports, etc. does not just serve to increase its competitiveness, but aims to eliminate competition as well.

2. Freedom from the effects of economic cycles

Economic ups and downs are inevitable in economies throughout the world and nobody can stop them. China is currently facing a downward cycle that began in 2013, and there has been no significant improvement. This shows that the current cycle is not over and the downturn is still dominant. Economic cycles deliver fatal blows to cyclical industries, and real estate is a typical cyclical industry. When a negative cycle hits the economy, property becomes very difficult to sell, no matter how much sellers lower prices; the property buyer mentality is to buy in a rising market. China’s real estate market went through two downturns in 1993–1995 and 2007–2008. During those times, survival became extremely difficult for enterprises. Wanda underwent transformation to make itself immune to economic cycles. In its asset-light business model, Wanda’s mall developments use investment funds from institutional investors or funds raised through investment products. With no property purchases involved, and with Wanda’s mall business being cycle-resistant because it targets mass consumers, the performance of Wanda’s mall investments has little to do with the rise and fall of property prices. This is how Wanda avoids being affected by economic cycles.

Why did Wanda go into the cultural industry and sports industry? The cultural industry in the U.S. accounts for 24% of GDP. U.S. top exports are not weapons and passenger planes, but cultural products, which include movies, music, comics and book copyrights etc. Currently, the cultural industry in China accounts for just 3% of GDP. In 2014, the size of the American sports industry was close to US$500 billion. In contrast, China’s sports industry has yet to be developed. Its related industries, like sportswear and shoes, total only about 300 billion yuan, a tenth of that of the Americans. The average per-capita spend on sports in the U.S. is fifty times higher than in China. The cultural and sports industries in China are just starting to take off, and there is huge space for future development. In addition, these industries are not prone to the effects of economic cycles. Sometimes, the consumption of sports and cultural products actually increases during economic downturns – people go to the movies or watch sports on TV to relieve stress related to a negative economy.

Wanda is aggressively pushing into third- and fourth-tier cities using its asset-light strategy because of the higher consumer loyalty in these cities. Wanda has opened seven malls in Shanghai, and we are planning for a total of 20. However, our business influence can only reach a fraction of Shanghai’s population, and some areas are already saturated. The situation is different in third- and fourth-tier cities. One Wanda mall is enough to cover the entire population of one city. Take for example, Langfang, in Hebei province. Its urban population is just under 400,000, but there are 40,000 to 50,000 customers at the local Wanda Plaza every day, about one-seventh of the city’s population. And in Wanzhou, Chongqing, the local government at one time repeatedly invited Wanda to build a mall in the city. However, research conducted by Wanda’s development department was negative. Wanzhou has a population of only 400,000, and the region was classified as economically backward. Nevertheless, I took into consideration the local government’s enthusiasm and decided to go ahead with the investment anyway. At that time, I decided that if the investment was not successful, we could write it off as a form of contribution to the alleviation of poverty. Surprisingly, when Wanzhou’s Wanda Plaza began operations, it broke Wanda’s record for volume of mall patrons upon opening. Over 1.1 million people visited the mall in its first three days, which means most Wanzhou residents visited the mall a few times over three days. Many third- and fourth-tier cities lack comprehensive consumer hubs and good hotels, and these are what Wanda builds as soon as it enters these areas, and which become the first choice of consumers. The rate of return from rental investments is also higher in third- and fourth-tier cities compared with that of first- and second-tier cities.

3. Relationship between four main industries in which Wanda is involved

Wanda currently has operations in commercial property, cultural tourism, finance and departmental stores. Whether Wanda employs asset-light or asset-heavy methods of development, these four industries support and complement one another. Previously, Wanda developed cinemas, electronic game arcades and discount KTVs (karaoke systems) in order to provide mall customers with a vibrant experience, and this required substantial support from cultural and entertainment fields. In recent years, Wanda has been searching for a development partner that can incorporate children’s entertainment into its malls, allowing them to be able to cater to patrons of all ages. There is currently no company in the country that provides comprehensive services for children – most only specialize in one particular area like children’s retail, entertainment, or education. Foreign companies who have what Wanda needs are unwilling to operate in China, and even if they are, they develop at the rate of one outlet per year or one every two years, which is insufficient. We have no choice but to develop our own one-stop comprehensive service for children, and we named it “Kid’s Place”. It combines children’s entertainment, retail, education, as well as food and beverages. Kid’s Place was set up last year with nine outlets, and 2015 will see over 30 opening up. With assorted services for children, there has been a significant increase in customer volume at Wanda’s malls. From now on, Kid’s Place will be a standard item in Wanda’s malls. Since Wanda’s commercial property business adopted the asset-light strategy, our malls have seen rapid expansion. Hence the number of children’s entertainment outlets is set to increase, and the growth of cinemas will accelerate as well.

Under the asset-heavy business model, Wanda opens over 20 malls in a year. After Wanda’s transformation into the asset-light model, 50 malls can be opened next year. Our highest target is 100 malls in a year. By 2020, two-thirds of Wanda’s revenue from commercial property will come from rental. Wanda will then no longer be a real estate development company, and market valuation will change. By the time Wanda’s malls are spread throughout all provincial capitals, prefectural-level cities and counties, it will have a yearly consumer volume of over 10 billion, covering a population base of 700 to 800 million; all consumer data for China’s primary consumers will be in the possession of Wanda. Consumer data held by Wanda not only consists of shopper data, but also includes data from other realms such as cultural, entertainment and food and beverage. Compared with the typical e-retailer, our consumer data is more complete and accurate. This provides the best foundation for Wanda’s Internet finance business. At the same time, we are developing a point of sale (POS) system that allows us to monitor the hundreds of POS terminals in each mall. We will be able to obtain data on each retailer's cash flow, and Wanda’s Internet financing can provide loans for them based on a daily repayment system. Compared with traditional banks, such an operation has lower costs and lower risks. Hence, Wanda’s transformation allows the four industries it is involved in to support one another and mutually add value.

III. Reasons behind the fourth transformation

1. Change of trends in the industry

A turning point has been seen in China’s property market – a state of balance between supply and demand will emerge. This turning point is not V-shaped but is shaped more like an elongated “L”. China’s property market will never be able to offer the buyer instant profits again – the era where you can get rich while lying on your back is gone. This is our long-term view of the trend of the property market, and Wanda cannot continue on the asset-heavy path that relies on sales for cash-flow and investments in Wanda malls, because the property market will gradually return to offering only average returns.

2. To be consistent with China’s national strategy

The entire Chinese economy is going through transformations and structural adjustment, and the country is willing to pay the price. The main objective of transformation is to achieve a state of economic growth that is based on domestic demand. Currently, 60% of products made in China are exported, and only 40% are consumed domestically. This means that for every 100 yuan worth of goods produced, 60 has to come from foreign demand to support China’s economic growth. In contrast, 85% of American products are consumed domestically, and in most developed economies, domestic consumption rates are in excess of 80%. If China can achieve the same consumption rate as developed countries, its macro-economy will be much more stable. China will also become the world’s largest consumer, which will give China a greater say in international affairs. Wanda’s transformation is consistent with China’s economic strategy. Investment does not mean increasing production capacity, the four main industries in which Wanda is involved are modern service industries encouraged by the government. Increasing investments in them while expanding their scope and increasing domestic demand is exactly what China’s economic transformation requires.

3. Wanda’s enterprise culture

Wanda is an enterprise that keeps on evolving, one that is constantly reinventing itself. It is an inherent enterprise culture that continuously recreates itself. Only in this way can new business models be discovered, long-term cash flow achieved, profits increased, and safety of the enterprise ensured. We are working to achieve what we set as a company slogan 20 years ago, “Wanda International, an enterprise spanning a century.” In practice, Wanda has been tirelessly innovating towards a business ecosystem where its operations in four main industries can support one another and grow together. Wanda will continue to be outstanding for a long time to come, whether I am here or not. Dell once said that his greatest contribution in life is having established a great organization. My own dream is to make my greatest contribution not only establishing a great organization, but also making it so that the organization will continue to grow healthily when I’m not around anymore.

Wanda’s transformations were not haphazard moves, nor were they steps taken out of impetus, but carefully planned and proactive transformations with clear goals. For instance, Wanda’s 2006 decision to go into the cinema business. At that time, box-office takings for the entire country was less that one billion yuan, and industry profits totaled less than 100 million. Such returns cannot support investments in the cinema business. However, our analysis showed that with the growth of consumer hubs, the cinema industry would see explosive growth, and we were proven right. The cinema market in China had 10 consecutive years of growth above 30%, with box-office takings totaling 29 billion yuan in 2014. Wanda’s investment overseas provides another example. At a time when the negative effects of the 2008 financial crisis had yet to fully subside, we judged that it was a good opportunity for Wanda to make international acquisitions. In 2010, we started negotiations to acquire international cinemas and property as we felt that the global economy had hit rock bottom and it was a good time for acquisitions to be made at bargain prices. We bought AMC Entertainment in America at a very low price and made it profitable in the same year. We then listed it on the New York Stock Exchange in the second year, achieving a return of 400%. Wanda’s acquisition of AMC shook the whole of Wall Street. Many had expected Wanda to fail badly in this venture, but it turned out to be the opposite.

Wanda had been looking for hotel investments in London. In 2011, there happened to be a bank auction for a hotel apartment. We negotiated with them and they agreed not to hold an auction if we could sign the acquisition agreement within a week. As we had been researching on investing in Europe and knew what we were doing, we agreed, on that same day, to acquire the project for over 90 million pounds. Now, the residential part of the project has been launched and response was very good. Not only do we now have a hotel worth hundreds of millions of pounds, we also have extra cash of tens of millions of pounds. Had it not been for our continuous research of the market, we would not have been able to spot such a good opportunity. As the old saying goes, “opportunity only looks for the ones who are prepared.” Wanda has acquired premium projects in Madrid, Chicago, Los Angeles and Sydney. These did not come by chance. It was due to Wanda’s transformation drive and preparedness that Wanda was able to seize opportunities.

IV. Goals of the fourth transformation

Wanda is an enterprise with great aspirations. Without aspirations, Wanda would not be where it is now. We still have aspirations.

1. To achieve stable, long-term cash flow

Wanda has set greater targets and implemented greater changes in the fourth round of transformation. The company hopes that mid-term goals will be reached in 2020: to have income from services and net profits taking up at least 65% of that of the entire organization, while income and net profit from sales of property make up no more than 35%; to have overseas revenue accounting for at least 20% of the total; we will attempt to reach 30%. If cash flow from commercial property, culture and tourism, finance and departmental stores can achieve high stability, Wanda will have an “iron square” that will guarantee the stability of the enterprise.

2. Upgrading of Wanda’s asset structure

Firstly, Wanda has to become a modern service company. It has to shed all its involvement in real estate within five years and become a fully fledged high-tech service-based company.

Secondly, Wanda has to control upstream industry chains, as well as channels. Wanda sets clear targets when it steps into any industry. We do not take on low value-adding downstream roles in the industry, but control upstream chains and channels instead. For example, in the cinema industry, Wanda first built channels, followed by investing in movie-making and distribution. Once distribution and screening channels are secured, Wanda would have a say in the industry chain and not be subjected to restriction by others, thus maximizing profits. Wanda’s entrance into the sports industry also involved controlling upstream chains, gaining core resources of copyrights and marketing rights. We acquired the world’s second-largest sports marketing company, In-front Sports and Media AG, which held program copyrights and marketing rights of seven Winter Olympics events. All television and mobile device broadcasts of the events have to be approved by the company. In-front also has exclusive broadcast rights for the FIFA World Cup to Asia-Pacific regions. These are all core resources that are most valuable to a sports marketing company. Wanda plans to acquire two or three more sports marketing companies with unique core resources. Our goal is to become the largest sports marketing company in the world by the end of the year. More importantly, China’s sports scene had only started taking off, and the country plans to grow the sports industry to reach a scale of five trillion yuan by 2025, which translates to a hundred-fold growth in ten years from today’s 50 billion, a rather large cake to bake. Similar to Wanda’s investments in the cultural sector, Wanda’s sports marketing company has plenty of room for growth.

3. To become a world-class multinational company

Wanda must achieve the “2211” goal by 2020, which means that the enterprise must have assets of at least US$200 billion, a market value of at least US$200 billion, revenue of US$100 billion and net profit of US$10 billion. Wanda must also achieve the status of a world-class multinational company, making a bright mark on the world map on behalf of China’s enterprises, especially private ones.

Thank you, everyone!