This article was first published in the January 2014 China edition of Accounting and Business magazine.
For a decade, China’s automobile production industry enjoyed a so-called ‘golden age’, with 10 years of average annual growth of more than 20%. Now, while production and sales continue to rise, China’s auto market has entered a transitional period, shifting from a high-growth emerging market to a mature and stable growth market.
For the Shanghai Automotive Industry Corporation (SAIC Motor), the largest automotive corporation listed on the A-Shares market in China, that golden age continues, according to CFO Gu Feng, who notes that ‘all the numbers are at the highest points in the company’s history’.
SAIC Motor should, he believes, be able to seize the opportunities brought by this transition to further consolidate its leading position in the industry by improving product technology and products’ structures, boosting brand influence, enhancing management and actively participating in industry consolidation.
Key to this will be the development of innovation, Gu stresses.
According to the development plan for energy-saving and new energy automotive industry announced in July 2012, China’s cumulative production and sales of BEV and hybrid-electric vehicles will reach 500,000 by 2015, and 5 million by 2020. Indeed, the listed company is supplying two leasing companies with the Roewe E50 battery electric vehicle (BEV); he currently drives the car himself. ‘China is the world’s largest auto market, and the negative effects caused by increasing production and sales are getting more and more concerning. Thus, the development of new energy-saving technologies is the trend for China’s auto industry during the process of building a “Beautiful China”.’
A key part in SAIC Motor’s future success will be the maintenance of a healthy industry chain, exemplified through the so-called ‘smiling curve’ law, illustrating value-adding potentials of different components of the value chain.
‘The centre of value shifts towards the two ends of the curve, and the upstream – research and development – and the downstream – sales – of the industry chain see increase in profits. But from the perspective of the role of the market mechanism, each link of a healthy auto industry chain should enjoy a relatively equal profit,’ Gu explains.
In 2011, Gu set up a subordinate equity investment company to be used as a platform for SAIC Motor to participate in auto-related equity investment and enhance the ability of capital operation. ‘Taking into account the law of the smiling curve, we also encourage SAIC’s equity investment company to actively participate in investments in fields that belong to the high ends of the chain of value such as new energy, lightweight automobiles and the auto service trade, as well as laying a solid foundation for the enhancement of the core competitiveness of the company and gaining competitive advantages in the future,’ he explains.
Shift of focus
Through restructuring, SAIC Motor’s auto parts and service trade businesses have been incorporated into the group, extending the group’s business towards the two ends of the industry chain. The focus has shifted from finished vehicles to the whole industry chain including R&D (research and development), manufacturing, spare parts, leasing, finance and logistics, opening up new and wider profit space and enhancing long-term competitiveness and the ability to resist risks.
In addition, the development of SAIC Motor’s original brand manufacturer business has helped the company to move towards the higher end of the industry chain. For example, in the past, the group’s auto parts enterprises were mainly responsible for supplying spare parts for the joint vehicle manufacture ventures, while R&D for SAIC Motor’s self-owned brands models was carried out entirely independently. Now, development efforts are synchronised with that of the auto parts factories, enabling enterprises to cultivate their R&D capabilities. What’s more, it also helps to create a platform for SAIC Motor to build up its own core competitiveness, creating conditions for the group to grasp the higher end of the industry chain.
As with the integration of R&D processes, SAIC Motor is striving to streamline the finance function, too.
The asset structure of SAIC Motor is multilayered and complex, with more than 300 companies submitting reports. Originally, all reports were submitted manually, and accuracy and timeliness of data was a challenge. Over the past three years, Gu has given top priority to the implementation of financial information systems.
In order to establish a more complete report information system and budget management system, Gu led a project team whose first task was to establish a uniform accounting system. This included clear account definitions at the group level that is in compliance with accounting standards as well as meeting the needs of the group’s companies. Successful implementation has enabled SAIC Motor to improve the quality and efficiency of report consolidation and budget projections, and provide timely and accurate data for the group’s strategic decision-making.
A question of strategy
For Gu, strategic thinking is key to the value of the finance function but has tended to be a weakness among most financial personnel in the profession.
‘Financial staff have been heavily criticised because of short-sightedness,’ he says. ‘In fact, so-called strategic thinking, simply put, means to adopt a long-term point of view. How to allocate financial resources to meet various needs? How to deal with projects that are not profitable in the short term? To answer those questions, financial personnel must adopt strategic thinking at the company level.’
Gu is also responsible for SAIC Motor’s mergers and acquisitions (M&A), working with the company’s capital operation team. As well as exploring traditional automotive technologies, they have also focused on leading-edge technologies. They not only make rigorous risk assessments from a financial point of view, but also look at the long-term value of the acquisitions as well as expansion in emerging technology areas according to the company’s strategic needs and value creation in the future.
In terms of domestic M&As, SAIC Motor’s objectives are to expand production capacity and achieve a rational layout in the country’s major regional manufacturing centres; to reduce production costs; and, using local resources, open the market of local government and taxi cars.
As for overseas M&A, the focus is on new technology and energy. In 2012, SAIC Motor tried to acquire a US company that was developing and manufacturing a new energy battery. Although the attempt failed, it demonstrated SAIC Motor’s long-term approach.
‘Currently, the world’s automotive industry is experiencing a process of fusion and restructuring, and the emerging technologies are changing the pattern of the automotive industry,’ Gu says. ‘In order to achieve leapfrog development, SAIC must be able to seize the opportunity in this process and make full use of external resources.’
At the same time, Gu believes that the role of the CFO is undergoing a strategic transformation, with the focus shifting from basic financial management to providing more support to the company’s decision-making and participating in the company’s strategy formulation. The CFO’s role has, he believes, changed from that of ‘accounts keeper’ to team manager and company leader.
The CFO should, Gu suggests, be required to participate in the whole process of formulating value creation strategy, leading the team to improve the company’s ability to retain and increase asset value, and maximise enterprise value. Meanwhile, the CFO is also the administrator of the workflow system, responsible for implementing the value management systems and process management strategy which support the company’s strategic plans, and ensuring the healthy and smooth operation of the process management system.
Gu reflects that, over his career, he has learned a number of key lessons. First, cooperation is vital.
‘When I first started work at an enterprise, I was always happy to help others as long as I had the ability and time. By doing this, I not only built a harmonious relationship with other team members but also quickly familiarised myself with the different positions of the finance department, which was very helpful for my further development.’
Secondly, a key skill is to do the job well. ‘Corporate finance is more than just accounting,’ Gu says. ‘It also includes budget, capital, tax, asset evaluation, project investment management and so on. Some positions are accounting-oriented, others are auxiliary. Whatever the position is, you must do a good job professionally.’
Thirdly, communication skills are essential for career development. ‘You can’t act like a mere “accounts keeper” or a fault-finding auditor who negates everything but offer no solutions,’ Gu says. ‘You have to communicate and exchange ideas with others, making use of informal occasions.’
Finally, Gu urges, always maintain an optimistic attitude. ‘It is a big challenge for financial professionals to both strictly adhere to the principles and at the same time be flexible enough,’ he says. ‘You will be under a lot of pressure, and if you can’t adjust yourself, you won’t be able to perform well.’
Qian Yunlai, journalist