CONSUMER: Embattled Gree Goes Goodwill Hunting with Big Raises

Bottom line: Gree’s new largess to employees with an across-the-board raise is an attempt to win back public good will, following setbacks for chief executive Dong Mingzhu in her attempt to defy shareholder wishes. 

I don’t usually write about Gree (Shenzhen: 000651), but an unusual storm of controversy around the home appliance maker nicely summarizes several tendencies that make Chinese companies both entertaining but also frustrating for westerners like myself to observe. The company’s main claims to fame are its air conditioners, and also its colorful chief executive Dong Mingzhu, who is often called China’s most powerful businesswoman.

Dong was doing a bit of goodwill hunting in the latest headlines, with word that Gree has decided to boost wages for all of its 70,000 employees by a 1,000 yuan ($145) each per month, a relatively large figure that probably equates to raises of 10 percent or more. The bigger subtext is that this raise comes after a series of personal setbacks for Dong, making the move look like her attempt to win back public approval and restore confidence in her leadership.

Dong’s misstep that touched off this latest controversy began earlier this year, when Gree announced it would buy a new energy car maker called Yinlong, also located in the company’s southern hometown of Zhuhai across the border from Hong Kong and Macau. Dong figured nobody would mind, since Chinese companies frequently venture into hot new areas that are often unfamiliar territory, even though they have little or no related expertise.

I was previously critical of Dong for a similar move last year, when Gree piled into a smartphone market that was already overcrowded and sorely in need of consolidation. (previous post) Never mind that Gree had zero experience in the area. Fast forward to the present, when I suspect that Gree’s smartphone business is probably losing big money, and the brand has zero recognition among consumers and will probably get quietly shuttered in the next year.

But let’s return to the more recent past with Dong’s dreams of electric car production, which has also become an extremely hot area due to strong support from Beijing. Dong probably assumed that she would get a rubber stamp of approval from her government and private shareholders for the move. That’s because many Chinese CEOs are used to running their companies like personal fiefdoms and pay little or no attention to minority stakeholders.

So Dong got a rude awakening when shareholders abruptly vetoed her electric car dreams in late October. (English article) She later became quite vocal on the issue, and was quoted venting her frustration at shareholders for voting down the deal. Then she was suddenly stripped of her chairman’s title at the company she has headed for so long, though she remained chief executive of the publicly listed home appliance maker Gree.

Making Amends

After all those setbacks, Dong appears to be trying to make amends by offering this new across-the-board 1,000 yuan salary raise to all of her company’s 70,000 employees. (Chinese article) The raises will become effective next month, providing a nice Christmas present for workers, even though most people in China don’t celebrate the holiday. One report points out that the raise equates to about 7 percent of Gree’s expenses, meaning its profits will probably take a comparable hit in the next few quarters.

But at the end of the day, things like profits and company fundamentals really aren’t the most important thing here. And for anyone buying Chinese stocks, it’s always good to keep in mind a few things that are quite apparent from this Gree Christmas story.

First and foremost, anyone who buys stock in a Chinese company should be prepared to see its executives make all kinds of moves that might look irrational to a westerner. State-run companies are most prone to this kind of action, which is sometimes simply aimed at joining a hot new area and other times designed to please government officials. And sometimes such moves are simply whims of top company executives, with no other real rationale that makes business sense.

The good news is that understanding the motivation for such moves could actually help investors. For example, a company that enters a new business area to please government officials might end up getting preferential tax treatment for its efforts, or perhaps some low-cost new land to build a factory. At the end of the day, this latest tale of Dong Mingzhu and Gree serves to remind everyone of the special nature of Chinese companies, and also offers a glimmer of hope that someday their strong-willed chief executives might be forced to behave more commercially by equally strong-willed shareholders.