On the evening of January 17, 2008, *ST Chunlan announced that it would report significant losses for the year 2007. This came after two consecutive years of losses in 2005 and 2006, which meant that by April 26 of the following year, the company would have suffered three straight years of losses. As a result, the Shanghai Stock Exchange suspended its stock, and the company was forced to wait for further decisions from the exchange before resuming trading. This marked the beginning of the end for a once-dominant player in China’s air-conditioning industry.
Chunlan had once been a symbol of success in the Chinese appliance sector. In 1994, the company achieved a total output value of 5.2 billion yuan, with profits and taxes reaching 600 million yuan. Its air-conditioning production scale was the largest in the country, and its market share stood at around 30%, making it the leader in the industry. It then expanded into motorcycles, trucks, and high-energy power batteries, becoming a model for diversification in the home appliance industry. Often compared to General Electric (GE), Chunlan was seen as a national success story. Its chairman, Tao Jianxing, even won the 2002 CCTV China Economic Year Award.
However, today, Chunlan is a shadow of its former self. Its stock price has dropped from a peak of 64.3 yuan in 1998 to under 6 yuan today—a tenfold decline over ten years. By 2006, *ST Chunlan only generated 2.2 billion yuan in revenue from its core business, down by over 10 billion yuan from 2005. In 2007, it reported a loss of more than 200 million yuan. Meanwhile, Midea Electric, a younger competitor, saw its sales soar to nearly 33.3 billion yuan that same year—more than ten times that of *ST Chunlan. Once a giant, Chunlan now finds itself struggling to stay relevant in a rapidly evolving market.
The question remains: what led to this dramatic fall? Many point to Chunlan’s diversification strategy as the main culprit. However, I believe that the real issue lay not in the choice of industries but in the execution of the strategy. While Chunlan made smart moves into sectors like motorcycles and trucks, it failed to implement these strategies effectively.
For example, in 1994, Chunlan entered the motorcycle industry with a large investment, building a production line capable of producing one million motorcycles and engines annually. Compared to companies like Lifan and Zongshen, Chunlan had a strong start. The motorcycle industry in China was booming during this period, growing at an average of 29.5% per year between 1993 and 1998. Despite these favorable conditions, Chunlan’s motorcycle division never reached its full potential. Similarly, when it entered the truck market in 1997, it initially performed well, even ranking third in medium truck production. Yet, over time, the business fizzled out.
This pattern repeated across all of Chunlan’s diversification efforts. The company chose promising industries and had the resources to succeed. But the problem was that it lacked the proper execution. Leadership lost its entrepreneurial spirit, internal cohesion weakened, and key reforms were blocked or abandoned. For instance, when Chunlan attempted to restructure its ownership through a management buyout (MBO) in 2002, it faced strong opposition and ultimately failed. This led to a loss of talent and confidence, further accelerating the company’s decline.
In summary, Chunlan’s downfall was not due to bad choices, but rather to poor implementation. It failed to maintain the momentum that had once driven its success. Without strong leadership and effective execution, even the best strategies can fail. Today, Chunlan serves as a cautionary tale about the importance of not just choosing the right path, but also walking it with determination.
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