TV tycoon Ni Runfeng gets switched off

In the face of intense competition from the likes of Konka and TCL, China's leading colour TV maker, Sichuan Changhong, had been moving towards privatization - or what the government coyly refers to for ideological reasons as an 'all-liquid share situation'.

However, last week the process culminated with the ousting of one of the granddaddies of China's corporate leaders, Ni Runfeng. Ni formed part of a pioneering and prestigious triumvirate including LeNovo's founder Liu Chuangzhi and the reclusive founder of the Huawei Group, Ren Zhengfei, who always refuses media requests for interviews.

All three are strong personalities and have great accomplishments to their name, but many investors suspect their best days are behind them now they head into their seventh decade.

"Any electronics business in China was originally part of the army. These companies are often marshaled in a very militaristic manner, with dictatorial CEOs," says one Beijing-based electronics engineer.

"Ni was simultaneously the chairman of the group and the listed company, as well as party secretary and CEO of the two entities," he notes. "It's interesting that different individuals will now be appointed to these posts."

In addition, some commentators believe Ni did sufficiently diversify out of the colour TV field where margins have been falling sharply.

Ni, known for his skilful balanced between growing the company and keeping costs in line, seemed to be on the right track with his plan to modernize the company by using a management buy-out to prize it out of the hands of the majority stakeholder, the local government of Mianyang city in Sichuan, where the company is based.

The local government was initially happy to go along, since selling down state shares is considered to be a useful source of revenue, as well as leading to a more dynamic entity - in turn permitting increased tax revenue.

The sticking point occurred when the city government refused to allow a generous share option scheme for management, a dispute about the size of the portion of shares which would held by the management, and also because of disagreement whether the city or the management would be in charge of the privatization process.

The city government was worried about an alliance with US giant Microsoft which Ni has announced just a few days previously.

From the government's point of view, if Changhong management were put in charge of the privatization process they could join up with Microsoft to pressure the government to sell state shares at a cut-price rate.

The selling of state assets is a very touchy subject in China, with the government attempting to control the minimum price at which these shares are priced. In practice, in the less well regulated parts of China, state shares are often sold cheaply or with the connivance of officials to related parties.

Many Chinese state-owned enterprises have been modernized to the extent of being corporatized, but the state initially remains the controlling shareholder through the classification of about one-third of outstanding shares as state shares. Unlike the looser classification of legal person shares sold to management, staff and outside investors such as SOEs, state shares can only be sold with express permission from numerous government departments.

Some newspaper reports have pointed out that Ni shot himself in the foot by not setting out a profit sharing scheme with the city government much earlier - as bitter rival Li Dongsheng of TV maker TCL had done as early as 1997. At that time Li negotiated a deal whereby the greater the profits the management team brought in, the higher its own share of the profits.

The top end of the scale was management getting 45% of the profit in the event of driving up profits 40%. Crucially, it was thanks to the proceeds of this scheme that management built up a sufficiently large war chest to buy out the city government. The firm subsequently carried out a successful listing in January this year.

In contrast, Ni only started talking to the city government in 2002, at a time when the stock market was falling and when in any case, the growth prospects of the now mature firm were nowhere near as explosive as previously.

In any case, like any good corporate story there is personal twist. The new head honcho, 41 year old Zhao Yong, is ironically a man who had already replaced Ni in 2000 only to be let go after he failed to improve the company's performance. At that time, although Ni left the CEO post, he had kept the chairmanship of the board.

Zhao Yong is considered a more modern manager, with a focus on using technology to move up the value curve and on generating the inventiveness to achieve the necessary prowess.

But despite the newcomer's reformist credentials, many give credit to 60-year old Ni. He built a stodgy SOE from the ground up, leading to a 16% market share last year and selling 12 million TV sets.

The share price has risen steadily from a yearly low of Rmb 6.80 in May to around Rmb 8.11 shortly before he was fired, before falling back to its current level of Rmb 7.45.