Zongshen Group

Topics: Fuel cell, Computer-aided design, Blue Ocean Strategy Pages: 7 (2198 words) Published: February 26, 2013
Case Introduction and Challenges
Chongqing, a city in central southwestern China, had a heritage in heavy manufacturing, as it was one of the centers of the Chinese defense industry, especially for vehicles. In 1980s, when the Cold War slowed, the central government wanted to reduce defense expenditure and asked some of the state owned enterprises (SOEs) to begin manufacturing civilian products. At the beginning only SOEs could get license for the business but government permitted people to go into business for themselves but they could only work as individual business operators and could not set up companies. Many of the SOEs turned to parts production. -------------------------------------------------

Zuo Zongshen, being a former motorcycle repairer, decided to open a motorcycle repair business in 1982 with the present condition in China. Almost all of the motorcycle industry was producing imitations of Japan motorcycles at first as they could not afford any investments for research and development. By 1992, the regulations had changed and individuals were permitted to set up private companies, so Zuo quickly set up a company to assemble motorcycle engines from purchased parts which was capitalized at CNY500,000. The parts that were manufactured by SOEs were the copies of Japanese engines. There were several hundred of these suppliers and assemblers had to figure out how to select the right ones. Being a former motorcycle repairman, Zuo knew which factories made the good ones and what were the good brands. -------------------------------------------------

After 3 years of assembling, Zuo was dissatisfied with the approach as it was not easy to get parts from manufacturers as they were mainly responsive to large scale SOEs. He used to use his network and sometimes “red envelopes” to get the parts. With the experience he had, he has started to make core components in house and increased the number of the components in house production as his capabilities improved. He classifies the necessity to do this in three drivers; to make a differentitation, to guarantee the supply and also to upgrade the parts as a good start for innovation. In order to improve quality and reliability of parts that it produced as well as to reduce production costs, Zongshen started applying advanced technology tools such as computer aided design and computer aided manufacturing to its product development. Besides, Zongshen also sought manufacturing consultant from former Honda employees and visited its competitors and prospective partners like Harley-Davidson in the United State. As a result, Zongshen was stood out in the common manufacturers throughout the country.

In 2000, Zuo decided to build up the company group structure. They splitted the responsibilities between the departments. Then they decided that they should tap into capital markets. Becoming a world class competitor would require a lot of capital, if the company could float its stock, it would have a source of equity capital. The technique that Zongshen used to raise its financial capital is very artful. Instead of following the tradition method which is through an initial public offering (IPO), Zongshen used another technique called “Reverse Merger” or “Backdoor Merger”. The technique can be described in detail that Zongshen had a target list of companies which had an existing list but lack of assets or liabilities. Once Zongshen could attain one from the list, it would merge its assets into. This technique is very critical for the success of Zongshen. In fact, when it became the largest shareholder of a Chengdu company, it divested the assets of the original company and inserted its own assets from the engine company. As the result, it turned into the largest engine...
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