How to Define Our Future Business Model

Ren Jianxin

The challenge China faces today is how to establish the ideal New Normal. The challenge ChemChina faces today is how to get rid of the Old Normal.

At ChemChina’s work conference held at the beginning of this year, I put forth two priorities around the central task of improving business quality and efficiency, which are the cornerstone for us to achieve sustainable development. The first is to try our best to establish an advanced business model, and the second is to act faster to build up an effective incentive and restrictive mechanism. A modern business model usually has the following characteristics—being market-oriented, innovation-driven, inter-disciplinary coordinated and talent-guaranteed. “Market-oriented” means that we should aim for realizing values for customers, pinpoint our market positioning, and form differentiated competitiveness. “Innovation-driven” means that we should put in place an innovative mechanism and entrepreneurship and continuously upgrade and develop our businesses by means of both tangible and intangible assets in our hands, the further extension of our core capabilities, and the all-round innovation in manufacturing technology, product, , business models & forms and organization. “Inter-disciplinary coordinated” means that based on our core capabilities, we should set up an open system, combine the division of duty with coordination and interconnectivity, and establish a coordinated system that consists of vertical integration within the company, lateral integration between enterprises, and end-to-end integration throughout the value chain. In that way, we can create a corporate eco-system featuring mutual benefits and win-win development Internet supported by IT infrastructure. In terms of resource guarantee, the most central resource is talent. Singapore’s Temasek has maintained a high return rate of 18% on its state-owned assets for 30 years in a row, to which the key is that it hires the best professional managers in the world. The competence and professional expertise of a great team not only expand the space for corporate growth, make sure that the company neither falls behind nor gets lost in transformation particularly, but also help it overtake at the turning and enhance corporate values.

China’s manufacturing industry has developed rapidly in the 30-plus years of reform and opening up, during which it has undergone several “wave-style” growth peaks, realized leapfrog development and made China a world factory. In the meantime, we should be fully aware that the Chinese manufacturing industry is also faced with tough challenges. First, it has to shift from “made in China” to “created in China”. China’s manufacturing is large but not strong and is, as a whole, on the medium and low end of the global industrial landscape. Its products don’t have high added values either, and technical content and innovation capability also lag far behind the world’s advanced level. Second, it has to shift from “China quantity” to “China quality”. After long years of rapid expansion of production capacity, the manufacturing industry is characterized by obvious overcapacity and fierce homogeneous competition. The quality of its products is far inferior to the world’s advanced level and corporate values cannot be fully realized. Third, it has to shift from “Chinese product” to “Chinese brand”. In my opinion, the main connotations of modern brand shall be technical content and service level. However, the Chinese manufacturing still focuses on traditional production, its industrial structure is at the bottom of the smiling curve, and its industrial value added is low—a situation that hasn’t improved substantially. Therefore, the process of brand establishment should be the process of moving upward along the smiling curve to both ends of the value chain, especially the further development of corporate value by extending from manufacturing to service.

As an important part of the manufacturing industry, the Chinese chemical industry has enjoyed fast growth but is faced with severe challenges. How to step out of the dilemma? Apart from continuously improving our innovation capability, intensifying product design, research and development, and producing more premium products, another key is to keep innovating and upgrading business model and bear firmly in mind the two keywords of “transformation” and “service”. “Transformation” means that based on the current asset- and production-based manufacturing and on the premise of consolidating existing businesses, we should look for new growth points and explore new business models to strive for transformation and upgrading. “Service” means that we should move from production, which is at the bottom of the smiling curve, to services throughout the value chain to enhance corporate values. The services include product design, research and development, procurement management, marketing management, e-commerce, supply-chain finance, and information and data management. The combination of “transformation” and “service” means the transformation from production-based manufacturing to service-oriented manufacturing. Such transformation is becoming a major developing trend for manufacturers across the world today, and this trend has been continuously practiced and proven in developed countries.

We are looking at a perfect opportunity for transformation today because the Internet, big data and the integration of informatization and industrialization provide the right opportunity and strong backing for manufacturing to make a quick turnabout. The tremendous potential resulting from the combination of traditional manufacturing and emerging Internet will become the main tune in the transformation and upgrading of the Chinese manufacturing. The Internet economy, whose development is measured by a decade, has continuously been the new bright spot in the gloomy global economy. Symbolized by Alibaba’s high-profile IPO at the New York Stock Exchange, the Chinese enterprises that thrive on the Internet have been much closer to the center of world economic arena. A group of Internet-based leading enterprises are reshaping our lives. Tencent is the new constructor of social communication, Baidu is the new constructor of information search, and Alibaba is the new constructor of business forms. In its prospectus, Alibaba proclaimed that “we do not simply attempt to push the boundaries of technology—instead we seek to harness technological improvement to expand the boundaries of business.” Over a period of 10 years, the use of Internet has changed from a way of communication and information acquisition to a way of life for Chinese consumers, and Internet has become ubiquitous in every aspect of our lives. Nobody can ignore its success, nor can anyone deny that it will continue to profoundly change our world. It’s safe to say that while consumer Internet achieved huge success in the last decade, people put high hopes on the spring of industrial Internet in the next decade. However, due to immense investment, complicated model and poor duplicability, no consensus has been reached on the development of industrial Internet yet for the main reason that transformation is just too risky. Unlike consumer Internet that can be started by an individual from the grassroots level, the development of industrial Internet isn’t a bet on probability like sowing a lot of seeds but harvesting little. It is the re-creation and transformation of an entire industry, the nirvana of a giant, which requires greater courage and a more brilliant top design, but it is inevitable. Therefore, whether it’s Germany’s Industry 4.0, the United States’ National Strategic Plan for Advanced Manufacturing, or China’s “Made in China 2025”, they all point to the direction for manufacturing transformation and upgrading. We’ve realized that we have no other choice than pushing the reform of manufacturing enterprises with Internet thinking and technology.

After years of rapid development, ChemChina has grown into an important player in the chemical industry. The various challenges faced by the chemical industry also confront us. How to realize transformation from production-based manufacturing to service-based manufacturing is a strategic subject we must address. Riding on the trend of the time, we shall strive to realize the strategic transformation from a chemicals producer to a comprehensive service provider for the whole value chain management.

At present, our business still focuses on production and sales of chemicals as well as auxiliary systems that serve our own business development, such as research and development, purchase, trade, logistics and sales. The transformation in the future will gradually expand vertically along the value chain and product services will extend from traditional production and sales to all value added services targeted at the broad customer groups. With various links of the whole value chain integrated together, a one-stop service system covering product design, research and development, purchase, trade and logistics, production, direct selling and distribution, e-commerce and supply chain finance will build up. Information and data management over the entire supply chain can enable the chain to operate with thorough coordination, in high efficiency and at low cost and turn companies from purely serving their own growth to providing value-chain services for the broad customer groups.

Such positioning implicates the following major functions. In terms of product design, research and development, enterprises should assist customers with product R&D and design with its own perception of the market and understanding of the industry. Regarding purchase, by resorting to their wide supplier network, they can supply customers with up-to-standard raw materials at low cost. As for trade, thanks to their wide network of suppliers and cooperative processing enterprises, they have access to raw materials or finished products at lower prices and earn price margin through domestic and international trade. With regard to logistics, they provide auxiliary logistics services, such as warehousing, transportation, packing and customs clearance, and, through such one-stop services, optimize inventory and information flow, so as to reduce logistics cost and improve efficiency. As for manufacturing and contract manufacturing, based on their own capacity, partnerships with other manufacturers and the comprehensive platform covering enterprises in the supply chain, they are entrusted by customers to deliver comprehensive services from raw material purchase and outsourced processing and manufacturing to logistics and delivery. With respect to direct selling and distribution, via their own channels, close cooperation with those with brands and channels or third-party e-commerce platforms, they can provide such services as marketing, market promotion, distribution and coordinated supply chain management to meet different needs. Moreover, efforts should be made to gradually develop supply chain finance and big data on enterprise. The former uses various financial methods to provide financing services for customers along the value chain and help suppliers and customers improve the ability in handling receivables and payables and gain profit accordingly. The latter resorts to information and data management to integrate key data input along the entire value chain, realize data sharing and management as well as timely and smooth information flow, and devise customized supply-chain service for customers and their products. This will considerably reduce supply-chain cost of customers and products and improve supply chain efficiency.

We are aware that traditional enterprises extend vertically along the value chain by constantly breaking the limit, which has become an important direction of development for such enterprises. No matter it’s a traditional logistics enterprise setting foot in trade, a traditional purchase enterprise getting involved in trade and logistics, a traditional distribution enterprise engaged in purchase, trade and logistics or a large-sized trade enterprise extending to the entire value chain, capable of providing integrated supply chain management services including product design, raw material purchase and customer-end sales, they are all possible choices for transforming our previous industrial forms.

As a traditional production-based enterprise, ChemChina enjoys advantages in vertical extension along the value chain and thus can fully tap into its resources and capabilities to realize the target of transformation, becoming a comprehensive service supplier for whole value chain management. For instance, in terms of product design and R&D, we boast strong research capability thanks to a large number of excellent research institutes and researchers. As for purchase, we have rich experience in raw material purchase accumulated in business management over wide product categories as well as purchase platforms and purchase service ability built upon e-commerce purchase development. As for building of modern logistics systems, we resort to surplus inventory and inventory management capability of manufacturers nationwide to set up corresponding logistics and warehousing centers in core areas of the country. By combining water and land transportation, we can substantially reduce logistics cost and provide customers with expedited, convenient and economic logistics and warehousing services. Regarding manufacturing and contract manufacturing, immense excess capacity and manufacturing experience in wide product categories can be used as the favorable foundation to provide third parties with manufacturing services in the future. With respect to market expansion, the globalized business layout and possible mergers and acquisitions in the future jointly pave the path for us to integrate market resources and realize coordinated layout. E-commerce sales ability that we have made great efforts to build up in recent years will also gradually enable us to serve a wide range of customers via third-party platforms and lay important ground for future sales service. With regard to supply-chain finance, by relying on the platform of ChemChina Finance Co and cooperating with related financial institutions, we can set up a supply-chain financial service system. As for information and data management, by developing a system encompassing e-commerce-based sales, purchase and logistics and with continued input into the building of a unified ERP system, we can put into place a complete supply-chain information management system.

The strategy of developing into a comprehensive service provider for value chain management points out direction for us on the value chain-related work and helps us identify the roadmap of development planning and clarify the work focus in the short and long terms. Our objective of business transformation is to establish a customer development and management system jointly supported by direct selling, distribution, foreign trade and e-commerce with the vision of delivering whole value chain services. Meanwhile, we will strive to set up a supporting system mainly consisting of an e-commerce trading platform and an e-commerce purchase & trading platform to drive our transformation in the age of “ plus”.

It is especially important for us to define clearly our e-commerce strategy. In the short term, e-commerce sales can go hand in hand with other traditional sales methods as an emerging sales approach to play its marketing role, which will improve customer accessibility and increase transaction possibility at lower cost and in higher efficiency. On the other hand, the e-commerce platform, as the actual site where all sales happen, will play its role as a trading platform to reduce cost, enable transparent operation and block man-made profit leakage. Meanwhile, it will play its powerful role in data collection and via big-data analysis tools, realize real-time data analysis, providing important basis for precision marketing and fine supply-chain management. To this end, we can integrate the mode of combining online and offline customer development, the mode of offline customer maintenance and service, and the mode of online e-commerce into the sustainable O2O mode and realize consistent profits for e-commerce and traditional channels through institutional innovation, laying the foundation for corporate profit increase. In the long run, the development of e-commerce sales platforms should meet the requirement of whole value chain services and develop from a two-party platform serving the enterprise itself to a three-party one serving broader customers and reaping income. By integrating the mobile marketing network mainly intended for marketing and sales, the marketing data network based on order system and the marketing management network for the purpose of internal management, two-party platforms for serving enterprises themselves can be established with platform operation ability improved to swiftly usher in the Internet plus age and lay solid foundation for three-party platforms in the future. Furthermore, in the long run, e-commerce sales systems can be set up on the platforms for the main purpose of serving customers and the operation system can be constantly improved through innovative operation modes to realize the transformation of Internet marketing. Similarly, establishment of the e-commerce purchase platform will also follow the similar path as e-commerce sales. Starting from resorting to other third-party platforms for online and offline e-commerce purchase and transparent purchase, we will first erect a self-owned purchase platform for serving the enterprise itself and then transform it into an independent third-party purchase platform which serves broader customer groups and seeks for income and profit.

It must be pointed out that e-commerce is the development trend of new business modes and our new business modes must depend on Internet resources and platforms. In the just-concluded Berkshire Hathaway Annual Shareholder Meeting, Warren Buffett said he'd rather give up his USD1.5-million airplane than the Internet, which cost him USD100 a year. GE currently has 12,000 employees worldwide serving industrial Internet and its investment in building of the technical team reaches USD1 billion. We hadn’t understood why IBM sold the computer business years ago until the entire picture of its “Smarter Planet” initiative is gradually emerging. Peter F. Drucker also believes that Internet brings zero distance. Zero distance means that traditional management and organization modes based on Taylor system are lagging behind the time and manufacturing enterprises must transform from being enterprise-oriented to being customer–oriented and from large-scope manufacturing to large-scope customization. The tools and opportunities offered to us by the age of Internet are important foundations for us to realize transformation and the e-commerce platform will become the basis of our sales, supply and even the entire value chain services. Our sales and supply will mainly rely on the e-commerce platform.

Our objective of transformation is to attempt to set up a vertical chemical industrial eco-system led by ChemChina. Our taking-shape eco-system of sales service and purchase service as well as the ERP-based manufacturing management information system we have established in manufacturing have prepared sound ground for such a vertical eco-system. Guided by the vision of delivering whole value chain services, we will make unremitting efforts to build up a whole value chain service eco-system that is based on the e-commerce platform and integrates product R&D and design, purchase, manufacturing, trade, logistics and sales. By implementing the strategy of becoming a comprehensive service provider for whole value chain management, we will considerably improve our business level, business size and risk resistance capacity and realize sustained development of the industry.

At the 100th anniversary of issuance of Dow Jones Industrial Average, there was a celebration. Only one company was invited to the celebration and that was GE. In traditional industries, there are so many companies that talk, but there are so few that actually walk. It is similar with the current overcapacity. So many companies have keenly sensed the problem, so many have proposed grand visions and so many have put on the coat of Internet, but those that take practical and effective actions are always rare and valuable. ChemChina is now 11 years old and still young. But we know that those failing to keep abreast with the time will inevitably be phased out. Dedicated to the 11th anniversary of ChemChina.

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