Wednesday, June 25 was a day like any other. It was the last working day before the start of China’s Dragon Boat Festival, and as the afternoon rolled around, people began to get restless as they thought about the long holiday ahead.
And then, news of the early release of Huang Guangyu from his 14-year prison sentence broke.
Immediately, Huang Guanyu’s companies, Gome Retail (HKG: 0493) and Gome Finance Technology’s (HKG: 0628) previously sleepy stocks shot up 20% and 60%, respectively. At the request of the Hong Kong Stock Exchange (HKEX), Gome had to release a clarifying announcement to confirm that Huang had been released early from prison on parole.
The strategic release of this piece of news on the eve of the Dragon Boat Festival meant that its full impact had time to sink in when the HKEX closed over the long holiday.
Who is Huang Guangyu and why is he a living legend? How did he change the landscape of China’s retail industry, and what does his release mean going forward?
Huang Guangyu’s rags to riches story is like no other
Huang Guangyu, born Zeng Junlie, was born in 1969 into an impoverished family in Shantou, Guangdong province.
His father, Huang Changyi, was originally from a well-to-do family of scholars, while his mother, Zeng Chanzhen, hailed from a rich mercantile family that made a fortune in Thailand.
In the aftermath of the Cultural Revolution and Land Reform Law, his father’s family fell rapidly in status, and he had to marry into the Zeng family to make a living, with their children subsequently taking on their mother’s surname. However, local mistrust of the Zeng family’s overseas business eventually led to the family’s economic collapse.
Huang Guangyu had to pick up scrap debris to survive and eventually dropped out of school. At 16, he and his brother, Huang Junqin, decided to risk a long journey to Inner Mongolia to try their luck at reselling items scrounged from Guangdong.
Over the next decade, he rose rapidly.
At the age of 24, he was a billionaire, having built a massive retail home appliance empire with nothing but his bare hands.
By the time he was imprisoned in 2010, he was renowned as China’s richest man, with a net worth of at least RMB 45 billion (USD 6.4 billion). When asked about how it felt to be the richest man in China, Huang allegedly smiled and said: “It is like holding your right hand in your left hand. You do not feel anything.”
Huang’s sudden disappearance from the retail battlefield in 2010 may have been swift and complete, but tales of his business acumen are still whispered about in China as the stuff of legend. His early release from prison in 2020, however, may transform him beyond the realm of myth into a formidable reentrant on China’s retail stage.
Boldly revolutionizing China’s retail industry
After a skirmish with the police in Inner Mongolia due to smuggled goods, the teenage Huang brothers made their way to Beijing. They joined a huge wave of rural migrants seeking the glitter of the capital city in the 1980s.
Huang was enamored by the capital. At the entrance of Beijing Station, the hard-pressed teenager decided to splurge RMB 10 yuan (USD 1.41) on a photo to capture his first moments there. “Being able to come to Beijing to buy and sell was the most memorable moment,” he once said.
After exploring the city, the brothers decided to sell clothes and bought a large bag from the south of China to try their hand at being clothing vendors on the street. However, they threw in the towel after admitting they did not know enough about the fashion industry.
Huang then moved on to household appliances. At the age of 17, he bargained with a beleaguered shopkeeper to rent a poorly-located 100-square meter store in Zhushikou, Beijing, near Qianmen. The brothers named it “Gome”, the Chinese version of which means “beautiful country”.
The shift in focus to household appliances coincided with China’s economic reform in the 1980s, with real growth averaging 9% per year from 1978 onwards. Rising domestic consumption had led to high demand for imported goods and household appliances, and the Huang brothers capitalized on this to make a killing.
Contrary to other established retailers (of which there were many), the brothers went against the tide and departed from the norm in three ways.
Most retailers leveraged the short supply of goods to charge high prices: In contrast, Gome was famously known as a “price butcher.” Huang Guangyu charged extremely low ticket prices, leading to small profits but quick turnover.
Secondly, Gome leveraged its quick turnover to bypass brokers, purchasing directly from manufacturers instead to retain its own margins.
Retailers were usually reluctant to guarantee sales volumes or tie-up cash and therefore preferred to sell by proxy. Gome, however, decided to guarantee significant sales volumes to manufacturers, therefore gaining access to preferential conditions and prices in the wholesale market.
Thirdly, from 1991 onwards, the brothers began a cheap but aggressive advertising campaign in the mid-seam of the Beijing Evening News. In that day and age, advertising was seen as a strategy only adopted by failing businesses which could not make money—not to mention advertising in the unremarkable mid-seam between the main pages.
However, the sheer tenacity of these cheap advertisements made Gome famous throughout the city. Gome started a new trend, with other household appliance businesses following its mass-marketing and advertising strategy soon after.
Another risk that Huang took was to bet big on domestic brands. Although Gome started by importing foreign goods to feed demand, Huang dramatically switched his focus to selling domestic products, such as Haier, overnight.
Huang’s big bets paid off. By 1993, Gome had more than 10 stores and sales approaching RMB 200 million. Without a degree of any kind, or any formal business training, Huang had managed to build up a formidable empire by the age of 24 with nothing but the pennies he started out with.
That very year, his age-group contemporaries, Jack Ma of Alibaba (NYSE: BABA), Liu Qiangdong of JD.com (NASDAQ: JD), and Pony Ma of Tencent (TCEHY: OTC) were just about rolling up their sleeves and trailing in his wake. Jack Ma had barely started his first translation company, Liu was a sophomore in college, and Pony Ma was a freshly minted graduate.
A fast and furious risk-taker
After establishing Gome’s solid foundation in the industry, Huang Guangyu was not content with just being the king of the home appliance industry and embarked on a phase of aggressive M&A activity. Over the next few years, Gome acquired all its main competitors in the industry—Yongle, Sanlian, and Dazhong— leaving only a quivering Suning (SHE: 002024) behind.
Under Huang’s leadership, Gome was also famous for its strategic ruthlessness, with Gome cementing its reputation as an aggressive “price butcher” that left nothing behind.
In 2000, for example, Gome aimed to seize the color TV market by slashing prices. This led to the ire of a group of nine color TV manufacturers, who warned Huang to not disturb market prices under threat of cutting off his supply.
Huang, however, refused to budge even in this seemingly impossible situation. Rather, Gome stealthily sowed unrest within the alliance. Eventually, Panda TV took the bait and cut its prices as well. This single defection ruptured the alliance and triggered a price war between the erstwhile co-conspirators, with Gome being the ultimate beneficiary of the ensuing chaos.
Even Dong Mingzhu, the famously fierce chairwoman of Gree (SHE: 000651), reminisced of the danger of going against Huang in a price war.
“At the time, Huang Guangyu hit the malls with such a bargain price that he almost wiped out all of us small dealers,” she said. “We could not offend him too, it was such a big chain.”
Locals were thrilled whenever a Gome opened in their city, with its low prices drawing huge crowds to its door. Sometimes, Gome required police assistance to maintain order.
On the other hand, Gome’s price-slashing strategy led to strong opposition from local retailers when it entered a new market.
For example, when the chain entered Shenyang in 2001, the four state-owned shopping malls that controlled 80% of Shenyang’s home appliance market united to launch an all-out-blockade against Gome.
This involved guerilla tactics such as prohibiting local media agencies from reporting positively on Gome and sending hooligans to Gome’s shops to cause a ruckus. Manufacturers were also warned not to sell to them: Those who persisted had to disguise themselves before entering Gome’s out of fear.
Gome’s sales plummeted, but it launched a quick counterattack by inviting large, established non-local Chinese media to report on the Shenyang situation. Gome insisted on this being done in such haste that foreign journalists did not have time to pack warm clothing before coming – rather, Gome bluntly bought down jackets and handed them to journalists at the door of their malls.
Under pressure from the media and facing discontent from local would-be Gome customers, the alliance eventually had to back down.
Aside from his operational acumen, Huang also possessed shrewd knowledge of the capital markets. In 2004, Gome also managed to land itself a backdoor listing on the HKEX—a method used by companies that want to avoid the hassle and scrutiny of a formal public offering.
This was not because of Huang’s unfamiliarity with the capital markets. On the contrary, Huang cleverly explored a variety of listing options and had laid the ground for its backdoor listing through a shell company from an early stage, as a precautionary measure. Repeatedly, Huang used his savvy with the capital markets to take similar risks with securities regulators to consolidate his power, while still accessing funds for his many businesses later on.
A man both feared and loved
Huang’s strong personality was intensely polarizing. Manufacturers and competitors have called him a tyrannical under-cutter who squeezed margins in the industry, with his ruthless business tactics promoting a “triad corporate culture”.
At Gome’s Global Strategic Cooperation Summit in 2004, Huang replied to the criticism.
“None of us can escape each other. The possibility of anyone squeezing one of us out, or controlling anyone else in the palm of their hands, is small,” he said. “When I do things, I follow one rule. If you trust me, I will trust you more greatly. If you contribute to me, I will take the lead in supporting your brand. If you dare to be my, Huang Guangyu’s, opponent, I will always have a way to balance your opposition.”
On the other hand, other subordinates seemed to have respected him greatly.
“Without his dominance, it would be impossible for him to create such a large plate,” one employee said in 2007. “He is also a man of loyalty. Many people leave Gome but eventually, come back again. President Huang will not cast these people aside and may even promote them.”
Huang was also known for taking chances on people whom he trusted. In 1993, he met Zhang Zhiming, then his full-time driver. Won over by his “wisdom, insight, competence, and open-mind” during their in-car conversations, Huang brought Zhang into the business.
Zhang eventually became Huang’s second in command, although his official title in Gome was volatile—”It is easier to remember Zhang Zhiming’s name than his position,” was the catchphrase of the day. His competence also won over Huang’s sister, and Zhang eventually became Huang’s brother-in-law as well.
Huang was also a leading philanthropist. In 2005, Gome led Chinese business philanthropy for reconstruction after the 2004 Indian Ocean tsunami. Gome donated RMB 10 million (USD 1.4 million), including a personal donation of RMB 7 million (USD 988 thousand) from Huang, to sponsor the building of orphanages in Sri Lanka, Thailand, Indonesia, and Malaysia.
In 2008, he again donated HKD 50 million (USD 6.4 million) following the devastating earthquake in Sichuan.
In one of the stranger stories associated with Huang, he also abruptly decided to shave off all his hair himself in 2005, inevitably landing himself in China’s newspapers (again) as a style icon.
Rumors behind the move ranged from stress to a desire to give off a more peaceful, godfather-like aura following his ascent to the top echelon of the retail industry. Given the aura of mystery and the ruthlessness of his business personality, it is difficult to eliminate any possibility behind his brash move.
Huang Guangyu’s unprecedented downfall
In 2007, Gome was at its peak. Huang had a number of skirmishes with law enforcement from the scrappy beginnings of his business, but these had always passed over eventually. Gome only seemed to be moving from success to success.
“Currently, the Group owns the largest household appliances retail network in China and enjoys unrivaled advantage[s] in Beijing, Shanghai, and Guangdong…..we have strengthened our leading position in almost all markets where we have operations,” said Huang, in his last chairman’s statement of April 2008.
In fact, Gome was poised to take on the next big thing: the telecommunications industry.
“We are determined to invest substantial resources to develop the handset business and established a professional telecommunication business center,” he said, firing a warning shot at China’s telecommunications industry incumbents. “We will seek to consolidate telecommunication chains when the right opportunities arise.”
Little did he, or anyone know, how quickly the tide would turn.
Seven months later, Huang was being investigated for economic crimes, and HKEX indefinitely halted trading in Gome’s shares. By January 2009, Huang was forced to resign from Gome.
On August 30, 2010, Huang was sentenced to 14 years in prison for economic crimes, including illegal business operations, insider trading, and corporate bribery. Along with him fell at least nine officials, who were slapped with millions in fines or up to 14 years of prison time as well. The nation was shocked.
The lost decade of Gome
Gome has never recovered from Huang Guangyu’s departure.
The Huang family managed to retain control of Gome, with his wife (Du Juan), sister (Huang Xiuhong), and mother (Zeng Chanzhen) all deeply involved and known as the female triumvirate behind Gome. On the eve of Huang’s arrest, it is said that a tearful Du Juan promised that when he came out, she would give him a better Gome. In decidedly Mulanesque fashion, she cut off her long hair and began the arduous job of steering the company out from the crisis.
Over the years Du Juan and Zhang Dazhong, Huang’s loyal commander-in-chief, have done a respectable job in guarding the company’s assets. However, maintaining growth has proved more difficult.
Between 2008 and 2009, sales revenue growth was only 8%, compared to 72% in the previous financial year. Over the past 10 years, Gome has withered and barely managed to cling on to its assets.
Gome has also been left in the dust in the internet era due to the extreme conservativeness of its business strategy following Huang’s downfall.
From 2010 to 2020, the number of e-commerce consumers in China grew from 108 million to a staggering 710.27 million—one-tenth of the world’s population. Gome, however, was slow-moving to react in the absence of Huang’s aggressive risk-taking leadership. One can hardly blame them for shying away from risk.
Gome has suffered USD 8 billion in losses for three consecutive years since 2017. As of 2019, it only has 4.88% of the home appliance market, trailing behind JD.com (22.4%), Suning (18.09%), and Tmall (11.72%).
In 2010, Gome’s revenue was close to RMB 50 billion—almost on par with its revenue a distant ten years later in 2019, at RMB 59 billion.
Its remaining competitor, “little brother” Suning’s revenue grew steadily, in contrast, and was more than 4 times Gome’s revenue in 2019, at RMB 270 billion.
JD.com’s eventual success is also tied to Gome’s fall. In the aftermath of the financial crisis in 2008, JD was going through a life-and-death crisis due to significant investments in warehousing and logistics but limited cash. If it could not raise its Series B financing, it would have to be dissolved.
Two months after Huang was imprisoned, however, JD received a capital injection of USD 21 million from Today Capital and officially entered the home appliance market in 2009, challenging the weakened giant Gome.
If Huang had not made his ultimate missteps, there is no telling what Gome could have been.
At least, with Huang’s leadership, it might have retained its top position in China’s retail industry. At a stretch, it might even have become a terrifying monster of e-commerce retail with a substantial stake in the telecommunications and real estate industries — a bizarre agglomeration of Alibaba, Huawei, and Vanke perhaps. In 2020, these speculations are no longer meaningful but still leaves one thinking.
Huang Guangyu’s next chapter
The sheer force and speed of the rise of Huang Guangyu, and his faster downfall, is the stuff of legend in China. This, alongside his 10-year long period of ostensible dormancy, inevitably lends one to speak of Huang’s story in the past tense.
One should not forget, however, that Huang is only 51 years old. His ambition and talent are also backed by assets: at the moment, his net worth stands at least 3 billion even now.
Huang has also signaled that he is not a man who gives up. His unhappy successor, Chen Xiao, the former chairman of Yongle Electric (which was acquired by Gome), took over his position as Gome’s chairman and attempted to dilute Huang’s equity and remove him completely from the company’s board.
From a prison cell, however, Huang led an aggressive and ultimately successful campaign to throw Chen off the board. Chen did not last long, resigning in 2011.
In 2015, he again boosted his personal stake in Gome to consolidate his control in the retailer to 55.3%, his productivity even from jail putting all remote workers in 2020 to shame.
On the eve of Huang’s release, Gome’s sleepy business was also, coincidentally and suddenly invigorated by cash infusions: JD.com and Pinduoduo (NASDAQ: PDD) subscribed for USD 100 million and USD 200 million in convertible bonds in May and April 2020 respectively, the latter as part of a strategic partnership.
News of these strategic partnerships have invigorated analyst speculations on what Gome’s pivot may be, and the synergies that could result.
One thing is sure, however. It is difficult to believe that second life may not lie ahead for Gome now that Huang is back. The future is an open door for Huang, and the world awaits his next move.