During a recent visit to Wharton, Captain Wei Jiafu, president and CEO of Cosco Group, the world's fifth largest shipping container, spoke with Wharton management professor Marshall Meyer about the strategies he has followed to grow his company into one of the most successful businesses in its industry. He also discussed his future plans for the company, the challenges he faces grooming good management, his theory of investing, and the worries that keep him up at night. An edited version of the transcript follows.
Meyer: Captain Wei, Welcome to Wharton and welcome to Knowledge@Wharton. I am very pleased to have you with us today.
Wei: Thank you very much, Professor Meyer. It’s my great pleasure to be here.
Meyer: I would like to begin with a question about your title. The world knows you as Captain Wei, not president Wei. Why do you choose the title “Captain”?
Wei: It’s a very good question. I have many titles – director, master, president and chairman, but I prefer Captain. Why? Because in 1967, I began a career as a seaman and worked on a merchant ship for 10 years until I got the “Captain” title. I was young, only 28. I was captain of the ship for five years. I got a license and a certificate.
In 1982, my ship was posted in Philadelphia [ready] to carry winter wheat to China. The U.S. Coast Guard came onto the ship to look. I was so young and the ship was so big. So inspections were very strict. We invited the guest to drink beers, but they said “No.” Then they began the inspection. They checked every item, one by one and went down to the engine room, finishing the examination within one hour. Then they came to my captain’s room and asked for a beer, because there was nothing they had to worry about. Everything met regulations. They asked me: “Captain Wei, how many times have you been here?” I said: “This is my first time.” They asked: “Why are you so familiar with the U.S. coastal guard checking system?” I said: “I read your articles and became familiar with your rules.” They said: “Yes, Captain Wei. Next time, same ship, same Captain, examination exemption.” So I got a very good reputation during my first time in the United States.
So this is my second trip to Philadelphia. I’m very happy about that. I have learned from the United States. Jack Welch at GE was my teacher. My training class lasted three weeks, in 2000. Later, I practiced the theories I got from Jack Welch, and then I participated in a training class at the University of Cambridge in London. I also visited the Harvard Business School twice. So I got CEO management experience and thought about how to make it Captain Wei’s management experience.
I brought this company from a big loss nine years ago up to today, with a current profit of more than 20 billion RMB. So most people call me Captain Wei. Before, they say, you were the captain on a ship and now you are pushing and managing a big ship, Cosco.
Meyer: The year before last, the Cosco IPO, China Cosco, was launched in Hong Kong. Earlier this year, you did a secondary offering, in Shanghai. And you have now announced that the bulk assets of Cosco will be injected into the listed company. What further developments can we anticipate in the Cosco Group?
Wei: That’s a very good question. In my initial station, when I took over as president and CEO of Cosco Group, I immediately invited experts to help me make a Cosco Development Strategy Plan. And at that time, there were two transformations: One is from a global shipping operator to a global logistics provider based on shipping. And the second transformation is from a China-based global operation to a multinational company. We adopted these two strategies for nine years, and then everything changed.
Also, I had three “maximize operation” concepts: One was to maximize operation profits; two was to maximize corporate value; and three was to maximize shareholder return. This last year our IPO was listed in Hong Kong. We listed Cosco container line and also the terminal operation. This year we found that the China market is very huge. Chinese investors want to invest in my high-quality company. But initially, good quality Chinese SOEs had gone overseas. At the same time, I got the news that the Chinese government welcomes companies such as ours to come to China’s main board for a second listing. So we made the decision last year to go back to the mainland China market. And finally we are successful. Why? Two years ago we listed in Hong Kong. At its peak, the highest price reached $38 this year. But back in mainland china, we issued a price of 8.48 RMB per share and the highest price was 68 RMB. In China, the capital market immediately boomed from a 70 billion RMB capitalization up to a 500 billion RMB capitalization. It is booming.
So I found that shareholders are very keen on buying China Cosco. And we must be following up to maximize shareholder return. How do we do that? We inject the bulk shipping fleet asset to China Cosco. And we don’t want to take money from China Cosco. I need shares. We use the shares to bring change. The Cosco Group holds the majority of the shares. We control the company. And after that, you remember my strategy: I want to build another Cosco Group. That is a capital Cosco Group. It means the existing Cosco group appointed by the Central Government will use its assets in the capital market to rebuild a capital Cosco Group. So in the future, after this injection of bulk assets into China Cosco, other assets will be gradually be injected into China Cosco.
The Cosco group is registered in China. Its headquarters are registered in China. We call it a Chinese company. But in fact, Cosco is really a global company. After listing, the shareholders invested globally. So we said Cosco is really a global company. The investors include American investors and European investors and others. I do any job for the global investors. They share the profits from China Cosco and we make contributions to global people.
Meyer: Let’s turn back to the shipping business. Cosco is the number one carrier globally. But Coscon, your container business, is about number six. Do you plan to extend Coscon’s roots or services so that it will become number five, number four, maybe number three, two or one?
Wei: Certainly. I will try to make Coscon number one in the world. We develop different types of fleets, for example, container fleets right now. We operate 440,000 TU capacity, ranking number six. According to my plan, in the year 2010, we will reach 800,000 thousand TU, almost double. And in the year 2012, we will reach one million TU capacity. So at that time, we will be at least in the top three.
Meyer: What is your competitive advantage, or potential competitive advantage, over Maersk Sealand?
Wei: Right now the top container carriers are all competitors to Cosco container line. But I don’t care about that. We know each other. We compete, but not just compete. We cooperate. I dominate the cooperation among the industry. So we shake hands with each other. For example, Cosco is within CKYH alliances. C is Cosco, K is Japanese Kawasaki line, Y is Taiwan Yangming and H is Hanjin Career shipping Company. We put all the ships together. That brought the largest alliances. And the total capacity is more than Maersk Sealand. We are running a lot of lines, for example, from the Far East to the Eastern coast of the United States, Boston. That is the CKYH line. And we also service the Western coast of the United States. So if we use the win-win or multi-win principle to shake hands with the other colleagues, other shipping companies, then that will be a good situation. If your goal is only to protect your own interests, everybody will become your competitor. Then you will set a limit on your own development. So I like to cooperate instead of compete. Sometimes it can be referred to as “co-opetition”. That is my principle.
Meyer: I’d like to switch to the bulk shipping business. In earlier conversations with you and with others at Cosco, we have discussed the fact that the Cosco bulk shipping business is divided into five entities today, Cosco in Tianjing, Qingdao, the smaller operation in Xiamen, Hong Kong and also Singapore. You’ve announced an intention to inject the assets into China Cosco. My question is this: Will you also integrate the operations of the four or five shipping companies?
Wei: That’s true. That’s what I am thinking of. That means injecting almost all shipping companies into China Cosco except Singapore. The small shipping line has already become China Cosco Corporation Singapore, a listed company. It cannot move from there. So we inject Cosco in Tianjing, Cosco in Qingdao, and also Cosco in Shenzhen -- not in Xiamen; Xiamen is general cargo -- and also including Hong Kong. The four shipping companies are to be injected into China Cosco. We hope to accomplish this by the end of the year.
Meyer: That’s a financial transaction. What about the management?
Wei: Yes. For the four existing companies, different companies have different operations and management styles. So there exist some problems and conflicts. After coming under one umbrella, China Cosco, the operations, must be unified as one, and management might be different, such as looking after the ship, ship repairing, hiring crew members, etc. But the operations must come under one policy. That will save costs and increase profits.
Meyer: In the past, it has proved to be difficult.
Wei: Yes, in the past, it has been most difficult. But now I can say it is very easy, within the listed company. The board of directors must also be unified.
Meyer: So another advantage of listing is the ability to coordinate.
Wei: Yes, coordinating within different membership companies. That’s a function of listing.
Meyer: That’s very interesting. You have said that Cosco will become an asset operator rather than an asset owner. I think the Knowledge@Wharton audience would like to know a lot more about the difference between the two and how Cosco has set an example for other large Chinese companies.
Wei: Here is my management concept: If we 100% own our assets, the financial capability is limited. You must be borrowing money from the bank to balance debt on your shoulder. The Captain’s shoulders cannot bear so much debt. But we have the ability to manage more assets. We have a very good team. They have the ability to operate double capacity, but we do not own all the fleet. I always tell them to use their knowledge to charter ships from the market. Some countries, such as Greece, have a lot of money to invest in ships but they don’t have the ability to operate. Ok, it’s a good time. We signed contracts with them, chartering their ships. We paid them charter rates according to the market. Then the amount more than the charter rate is my profit. However, if my price is under the charter rate, we will lose money. That depends on the management skill.
In 1999, I put my method into practice. I asked the subsidiaries to do it. It was difficult at first. One person said: “Too risky. We might lose a lot of money if the price is under the charter rate.” I said: “Just adopt the risk management theory, then we can operate more capacity. More cargo will support us.” Another person said: “Under this method, you don’t have the control over other ship owners, including crew members. If some outside ships with crew members join your Cosco fleet, will the Captains follow your instructions?” I said: “We are a global company. The concept should also be as a global company’s concept. Don’t care about such things as which company, which nationality, the captain is from. As soon as they come to Cosco, they will become the Cosco staff, adopting Cosco’s multinational culture.”
After practice, we feel comfortable. Then I asked them to expand the business. I took three steps. The first step is that chartering capacity composes at least one third of the whole capacity. We fulfilled this goal five years ago. The second step: half, half, fulfilled last year. And the third step: Two thirds of the capacity is chartered ships. That means using our knowledge, using our brain, using our organization to operate more ships, more assets.
For example, right now, we totally operate ships of 50 million deadweight ton capacity. Among them we own only 22 million tons. About 28 million capacity is through contracting and chartering. Our asset -- 22 million, 180 billion RMB, not counting these 28 million. If the 28 million is included, the total asset is more than that. So that’s our ability. Say 40% to 45% of the profit comes from chartering vessels. Without investment we won’t receive profits. The shipping fleet is getting bigger and bigger, and more and more shippers are looking for Cosco.
Meyer: Hasn’t the risk of chartering gone up? The current Baltic Dry Index is at or near all time high of about 11,000. Moreover, a lot of shipping companies are now playing in the Forward Freight Agreement market. How does that affect your ability to take risk?
Wei: We also use FFA. That is currently an international habit. We use charter, owner, and FFA, various methods to leverage risk. For example, if you are the investor to a capital market, when the market is going up, you make money. When the market is going down, you can also make money. Our method is to share risk. If you only use one type, you make no money. That is, making money from the fluctuation. With no fluctuation, nobody can make money: The price never changes! If you buy a stock with a $10 price, the next year the price is still $10. Then no profit. If today, it’s $10, tomorrow $8, next year $12, like this, then the qualified investor will be making a lot of money. High -- sell; low -- buy, buy, sell, buy, sell, always like that. So my operation is also like that. I hope the BDI market will fluctuate. If it is fixed, there is no chance to make money.
Meyer: Well, that market will fluctuate; it always has. Let’s turn to a different topic. You are the leader of a major global corporation. What has been your biggest leadership challenge at Cosco?
Wei: I think the strategy concept is the biggest problem for leadership. For example, in the initial stage when I took over as CEO, I said I invited expertise to help me to make the strategy plan. The previous manager, he is very qualified, making contributions to the company. He said: “We are the shipping expertise. We know the shipping industry. Why are you inviting outside people who know nothing of this industry to make a strategy plan? Why do that?” He is a senior person. I said: “There is an old Chinese saying: You can not see the whole picture of the mountain because you are inside this mountain. In China, the Yellow Mountain in Anhui is a very famous, very beautiful mountain. However, if the people are living inside the mountain, they will say -- nothing beautiful, only stones, trees, you cannot even see the sky clearly ….They don’t understand. But if you buy a helicopter and fly above the mountain, you will find the mountain to be very beautiful. We are like these people living inside the mountain. We cannot see the whole picture of the mountain. We cannot see the whole picture of the international shipping industry. But experts from the government -- they are the strategy planners for the Chinese government. They know the Chinese economy and the international economy. They know what will happen in the future. We need them to give us direction. According to these directions, we can do detailed operational strategy. That will be helpful.”
He finally understood. We used them for eight months. We invited 60 experts from China’s different departments to make the two transformation strategy. At last, the two transformations bring Cosco from a loss to a high profit. So I say the strategy concept is the biggest challenge. I always say: Study the rules of the market economy and the international shipping market rules, and then change your mind, and then reform the existing structure, habits, etc. This is very important. And later, from now on, everybody understands. Captain Wei made the right decision nine years ago to invite expertise.
But during the initial stages, not everybody supported me, even some managers. Some were openly against this decision; some just said nothing at all. Later, I made the decision to [have] an IPO. Some people said: “Why? We once earned 100% profit. Why do you send to the listing company only 51%, and share 49% profits with others?” They don’t understand. I said: “We must do this. We need financial support from the capital market. Even we sell out 49%, the cake is getting bigger. The 51% portion is much more than the original 100%, because the original one is a small cake. Don’t hesitate; just push it forward.”
Once, I wanted to reform Cosco Logistics, using the existing Cosco Container line, Cosco cargo forwarding, and Cosco logistics company -- to put three as one, and then divide the big one into two. I suggested this idea, but nobody accepted it. I invited an American company, AT Kearney. “Come to help me!” I spoke to them. Finally my strategy plan was agreed to by my subordinates since AT Kearney said: “According to our study, your company must put three as one, and divide the one into two. One is Cosco Container line, one is Cosco logistics.” Then everybody said: “Oh, here is the opinion from U.S. experts. Okay, I agree!” I just borrowed the American face and adopted my concept. You know, that is Chinese culture. If I don’t do it that way, nobody accepts my idea and it cannot be realized! So now you understand: In recent years, whenever Captain Wei has sent any proposal for further reform, the management team will accept. It only takes some time for it to be recognized by others.
Knowledge@Wharton: You’ve talked about how you prefer the strategy of cooperation rather than competition. But what if your competitors, that is, your peer companies in the industry, don’t want to cooperate? How you can convince them that this is a better strategy?
Wei: Yes, some companies don’t like cooperation. They refuse (to do so), so I just push them. For example, one time a very big shipping company in the container sector didn’t want to cooperate with others. It used to be a member of the Transpacific Stabilization Association; we are (already) a member of TSA. Then after an acquisition, they left TSA. I asked the manager: “Why do you leave TSA? Do you want to run lonely and drop your freight rate without limitation by TSA?” He said: “No.” Half a year later, the freight rate of that company dropped, damaging the whole industry.
The manager visited me in Beijing last year. He is a senior person, 93 years old. I told him: “There are three kinds of strategies. First, a win-win situation -- making a profit for yourself and also making a profit for others. This is the best strategy. Second, only you win and others lose. That is not so good but you still make profit. The worst one is -- let others lose and also lose your own. That is a very very bad strategy and your company adopted the worst one.” Then he understood. I said: “Last year, you made a profit of US$ 800 million, but this half year you lost US$ 600 million. Why? You adopted the worst strategy. Besides, you also damaged our interest, damaging the whole industry. As a leader of the shipping world, you should have the morality to protect the industry. If you only think about your own interest, when operating your own fleet, you will hurt others. In that stage, you will be the enemy of all people in the shipping industry.” Recently his company came back to TSA. I gave him a warm welcome!
Knowledge@Wharton: What do you worry about?
Wei: Right now I am worrying about the U.S. subprime market crisis. This is a big issue. Recently I referred to this issue twice in the Global CEO Forum in China. I spoke together with the Father of the Euro, Professor Mundell at Columbia University. I said: “I found recently that the Citigroup CEO was punished due to losing a lot of money buying into the subprime mortgage market. I think there might be big problems for the U.S. banking system.” I read a book three years ago from the United States. The writer said the U.S. capital market would collapse in the year 2009, two years from now. And the Chinese capital market will continue going up until the year 2020. I think the Chinese economy right now can do this because the Chinese Communist Party recently made a plan for the year 2020: The GDP will be tripled. But I found that the subprime mortgage crisis maybe is a sign that the 2009 stock market will [collapse], I talked with Professor Mundell about that and he said: “Captain Wei, it is a big issue. We need further study.” I worry about that. If the American subprime mortgage crisis causes the bankruptcy of a lot of banks, not only in the U.S., but also in Europe.... If the U.S. and European Banking systems run into trouble, it will be a big problem for the world -- the economy damaged, shipping demand damaged…
Meyer: Are other Chinese companies following Cosco’s strategy in seeking cooperation with your competitors?
Meyer: Can you give me an example?
Wei: For example, China Shipping. In the past, China Shipping was not cooperating with most other shipping companies. They want to go their own way, so at first we fought with each other. I am the chairman of the China Ship Owners Association. They are a member. I said to them: “You need to cooperate with others to protect our industry. Recently, they changed their president and CEO, so the collaboration between Cosco and China Shipping has already started. They no longer use the “freight rate drop” as a weapon right now since they want to make a profit. The freight rate drop is easy. As soon as you drop the freight rate, people will ask you why you did that. You then just attribute it to the poor service and low price. But actually the high quality service and high freight rate is normal.
Meyer: Are Chinese steel producers, for example, finding ways to cooperate with their sources of iron ore?
Wei: Yes. Even my company wants to cooperate with (those) steel companies for strategy purposes. Why? In order to permanently support each other. They are the shippers. We are the shipping company. The shippers also like to cooperate with our company. That is called the sustainable development method.
Meyer: So if BHP buys Rio Tinto, will that be good for cooperation?
Wei: I took a lesson from the University of Cambridge, two years ago. The professor taught me that in most industries, they must have some big companies to serve as the leaders to integrate the whole industry. That will save costs and generate high efficiency, providing more services to others. It also happens here in China. Cosco wants to be the leader in the world shipping industry.
Meyer: A couple of more questions. Looking ahead, what is the prospect for the Olympics? Will Beijing have blue skies and will all of us who want to get to Beijing be able to get there and find tickets for the Olympics?
Wei: I am confident that the Beijing Olympics 2008 will be successfully held. The Chinese government has paid full attention to this project and the Chinese people began preparing for the Olympics three years ago. For example, even the taxi drivers began English training and now can speak perfect English. Also, hotel servants are ready to serve customers with their perfect English. A lot of new hotels were just built and the arena for the games has been finished. A lot of new fascinating places have been built very fast. Everyone knows we must have a successful Olympics because it is our Chinese face.
Meyer: Thank you so much for joining us. We look forward to learning more about Cosco as all the new developments you describe take place.
Wei: Thank you, Professor Meyer. You are welcome to visit Beijing, and the Beijing Olympics.