Traditional pharma firm furthers reform efforts

Mixed-ownership helps Yunnan Baiyao respond quicker to global competition

Yunnan Baiyao, the Kunming-based manufacturer of healthcare products, has had two spectacular decades.

Since 1993, the year it became a listed company, its revenues have gone up 418 times and net profits have risen 240 times. Still, the company decided to create a mixed-ownership structure and to become much more market-oriented, so that it can adapt to internationalization and to the reforms of China's healthcare system.

In an extensive exclusive interview with China Daily, Wang Rong, deputy chairman of Yunnan Baiyao Holdings Co Ltd, explained the thinking behind the company's strategic reforms.

He said the ownership reform brings two good mechanisms: "The first is to make the decision-making process more efficient and effective. The second is to take a market-oriented approach."

"In the past, when the board wanted to make a decision, they first had to send documents to the State-owned Assets Supervision and Administration Commission for Yunnan Province. After the submission, we might have had to wait for two or three months. After they made a decision, we could start the board meeting," he explained.

"Now, the provincial SASAC has authorized board directors to make a decision first, then report to them. Or, if needed, company officials can just contact the director of SASAC and escape the paper work," he said.

"Under the current board structure, no one has ultimate control of the company. There is no single shareholder that controls the company because the provincial government has the same share as the largest private shareholder," he added.

Wang explained that company officials had to give up their ranks and titles as government officials. "We are now almost totally market-oriented. There are not many companies like us that have reformed so deeply."

He added that he himself, a former professor, represents the provincial government on the board because provincial government regulations say there can be no government officials in such mixed-ownership companies.

Wang explained that the government of Yunnan wants to upgrade the province's economy from a reliance on tobacco and mining, into a new model based on being a logistics and transportation hub, creating ecological industries and services, and on becoming a center for healthcare and healthy living.

"Yunnan's traditional industry relies very much on natural resources, which means we had to pollute the environment to achieve development. This must be changed. Within Yunnan's economy we should find some active, positive and better ways to develop the economy. That's exactly what the Yunnan provincial government is thinking. Besides what the government is thinking, Yunnan Baiyao is thinking that unless we have some inner reform, we will not be able to shift from the traditional Chinese medicine industry to the big health industry," Wang said.

"Our mixed ownership reform itself is a huge project. The Yunnan provincial government wants to build the big health industry and make Yunnan Baiyao the industrial foundation," Wang explained.

"In this context, the national government and the Yunnan government want Yunnan Baiyao to seize this opportunity and achieve this new development," he said.

The company is undergoing a two-stage mixed ownership reform process.

First, in 2017, YNBY Holdings issued new shares to two private companies. After this step, Fujian province-based private company New Huadu became one of the biggest shareholders of YNBY Holdings, with its 45 percent stake equaling the Yunnan provincial government's.

To avoid a deadlock in decision-making, Jiangsu Yuyue, a private manufacturer of medical equipment and devices, plays the role of "critical minority" with its 10 percent stake.

YNBY Holdings received 20 billion yuan ($2.98 billion) from the issuance of these shares.

In the planned second stage of ownership reform, YNBY Holdings will be merged into its listed subsidiary YNBY Group through a share swap plan. All of YNBY Holdings' shareholders will become direct shareholders of YNBY Group.

Of the restructured YNBY Group, New Huadu will own 25 percent of the shares, the Yunnan provincial government 25 percent, and Jiangsu Yuyue 5 percent. The other large shareholders will be Yunnan Hehe with 10 percent and Ping An Group with 9 percent.

The second step in the reform has already been approved by the board of YNBY Holdings, the shareholders of YNBY Group, and the provincial government.

The company is now awaiting approval from the China Securities Regulatory Commission, the national financial market regulator.

In the last 20 years, YNBY Group has grown rapidly - introducing many successful products ranging from bandages to toothpaste.

Wang explained why now is the time for change: "Despite our rapid growth, Yunnan Baiyao still faces new challenges. The first challenge is that our current products, especially our traditional Chinese medicine products, already command a huge portion of the market and the potential to increase that is very limited. The second challenge is that in China our pharmaceutical industry and our healthcare industry is rapidly changing," he said.

"The way we used to sell our products and do business is challenged by the market. For example, the government is now focusing on restricting medicine prices or even the quantity of drugs procured, and healthcare insurance is also undergoing reform," Wang said.

He explained that the Chinese market for pharmaceuticals is open to international competition. "Even if we just want to retain the Chinese market, we also have to face foreign competition or cooperate with foreign companies ... But in the end, we will be focusing on the Chinese market because this is the second-largest market in the world. We want to use international cooperation to enhance our manufacturing capabilities and eventually we will be able to serve the people better."

Wang said the company is cooperating in R&D with companies in Germany, Iceland and Israel, among others. It is carefully considering some international acquisitions and plans to set up an international investment fund in Hong Kong.

According to Wang, the current trade tensions with the United States have not yet affected Yunnan Baiyao.

"If we want to shift successfully, we will need new resources and new institutions. We want some strategic partners who can bring in either money or technologies. With the new institutions, we need to change the decision-making process deeply, ensure the management team is much closer to the market, and ensure the front-line workers are closer to demand, so that they are participating in the decision-making process," he said.