Instant ebooks textbook Corporate china 2.0: the great shakeup 1st edition qiao liu (auth.) download
Visit to download the full and correct content document: https://textbookfull.com/product/corporate-china-2-0-the-great-shakeup-1st-edition-qia o-liu-auth/
More products digital (pdf, epub, mobi) instant download maybe you interests ...
BE 2.0 (Beyond Entrepreneurship 2.0): Turning Your Business into an Enduring Great Company 1st Edition Collins
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made.
This Palgrave Macmillan imprint is published by Springer Nature
The registered company is Nature America Inc.
The registered company address is: 1 New York Plaza, New York, NY 10004, U.S.A.
I don’t know why we are here, but I’m pretty sure that it is not in order to enjoy ourselves.
Ludwig Wittgenstein
A CKNOWLEDGMENTS
This book grew out of my own research, teaching, and consulting experiences at different institutions in China over the past 15 years. I have benefited tremendously from suggestions, comments, encouragement, and support from many people, even long before I began this project in 2015. It is impossible to thank them all individually. Still, there are a few without whom this book would never have been written. Although I take full ownership of any remaining errors in the book, I would like to extend my gratitude to them.
I am grateful to my coauthors, with whom I have spent the best part of my academic life, for stimulating conversations, constructive debates, and, more importantly, inspiration and friendship. Part of the book has drawn on our collaborative works. I owe both personal and intellectual debts to many more than I can possibly acknowledge. I wish to thank in particular Douglas Arner, Chong-en Bai, Hongbin Cai, Bradford Cornell, Michael Darby, Qiang Kang, Paul Lejot, the late Joe Lu, Wei Luo, Rong Qi, Alan Siu, Frank Song, Xiaoquan Wang, Keith Wong, Nianhan Xu, Miaojie Yu, Yuande Zhu, and Lynne Zucker.
I owe many of the ideas in this book to the stimulating intellectual environment at the institutions that have employed me: Guanghua School of Management at Peking University, Faculty of Business and Economics at the University of Hong Kong, and McKinsey’s Asian Corporate Finance and Strategy Practice. I have benefited enormously from interactions with colleagues and former colleagues. Several of my friends and students have assisted with research for this book, shared research or archive material with me, or provided helpful comments on draft chapters. To list all of
them would greatly lengthen the book. However, there are some individuals who have been especially helpful and deserve special mention: Sherry Bai, Yuyu Chen, Zhiwu Chen, Joseph Fan, Helen Huang, Guohua Jiang, Li Jin, Jiang Luo, Dragon Tang, Qing Wang, Wei Xiong, Lin Xu, Se Yan, Joy Yang, Renxiong Zeng, Hong Zhang, Zheng Zhang, Ying Zheng, Xianmin Zhou, and Ning Zhu.
My gratitude also goes out to Siline Cen, Jingyi Liu, Yixiao Qing, and Yong Wei for their outstanding research assistance throughout my research career. Xiaoquan Wang, who was also my invaluable coauthor on some of the work summarized in this book, provided excellent research assistance throughout its development.
Equally important, I would like to thank numerous students I have taught at Guanghua School of Management at Peking University, the University of Hong Kong, and other places in the past 15 years. Part of the book had been used in my MBA course Corporate Finance at Guanghua, which has drawn more than 70 students each year since 2010. The materials contained in this book have also been used in my EMBA course Corporate Investment and Value Creation. More than two thousand EMBA students at Guanghua, from Class 68 to Class 108, have taken this mandatory course. I have also used part of this book in my Advanced Financial Management course in the Guanghua-Kellogg Joint EMBA program. Almost all of Guanghua’s EMBA students are corporate founders or executives with rich business experiences and deep insights about the Chinese economy and Chinese companies. I benefit tremendously from the interactions with them in the classroom, at the dinner table, and during late-night hangouts.
Several organizations provided me with generous support during different stages of this book’s preparation. I acknowledge the support of the National Science Fund for Distinguished Young Scholar (#71325004) and the Ministry of Education ChangJiang Scholar Special Professorship Scheme. I am also grateful to the New Finance Center at Peking University, Phoenix Finance, and PetroChina for generous research grants.
I also want to extend my thanks to the Palgrave Macmillan team. In particular, I thank Jacob Dreyer and Rachel Krause, my editors at Palgrave Macmillan, for their patience, encouragement, and support throughout the project. I thank Marcus Ballenger and the other staff members of Palgrave Macmillan for great skills and care in producing the final version of this book.
The book and the research underlying it would not have been possible without the strong support of my family, who have put up with my work. I want to thank my parents, who taught me how to stand firmly on sound principles. Finally, I want to thank my two sons, Alan and Nick, for providing a wonderful distraction from my research and writing. I hope that one day they will find reading the book enjoyable, and understand the reasons I was always away.
Qiao Liu
Beijing, April 2016
A BOUT THE A UTHOR
Qiao Liu is Professor of Finance and Associate Dean for EMBA in the Guanghua School of Management at Peking University. He is the winner of the National Science Foundation Distinguished Young Talent Award and the Ministry of Education “ChangJiang Scholar” Special Term Professor. Before he joined Guanghua in 2010, Qiao Liu worked as a tenured professor in the Faculty of Business and Economics at the University of Hong Kong. He also worked as a corporate finance expert at McKinsey & Company’s Asia-Pacific Corporate Finance and Strategy Practice from December 2001 to July 2003. Qiao Liu has published dozens of academic articles in leading journals including Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Accounting Research, Management Science, and Economic Journal. He is a co-editor of Asia’s debt capital markets: prospects and strategies for development (Springer, 2006). His book Finance in Asia: Institutions, Market, and Regulation (with Paul Lejot and Douglas Arner) was published by Routledge in 2013. Qiao Liu holds a PhD in economics from UCLA. Qiao Liu has a wide range of business experiences. He has conducted numerous consulting projects for leading Chinese firms and MNCs. He is the founder of Huaxinhui (TrustWorks), a platform advising Chinese local governments on financing issues. He pioneers the practice of compiling balance sheets and income statements of local governments, and providing them with market-based credit ratings. Qiao Liu is also co-founder of Oasis International Medical Group, a private healthcare company based in Beijing.
L IST OF F IGURES
Fig. 1.1
Global 500 companies: USA versus mainland China
Fig. 1.2 The four end scenarios of the Chinese economy
Fig. 2.1
ROIC of the listed companies in the USA: 1963–2001
Fig. 2.2 IBM’s share prices versus Standard & Poor’s 500 Index
Fig. 2.3 IBM’s size and market performance: 1990–1999
Fig. 2.4 IBM’s ROIC from 1971 to 2007
Fig. 2.5 Share prices of Suntech Power: December 14, 2005–November 8, 2013
Fig. 2.6 Suntech’s Pre-tax ROIC: 2007–2011
Fig. 2.7
Fig. 2.8 Market performance of firms born in recession: 1980–2010
Fig. 3.1 China’s GDP and the Shanghai Composite Stock Index, 2000–2014
Fig. 3.2 Average ROIC of China’s listed companies (equal weight): 1998–2012
Fig. 3.3 Weighted average ROIC of China’s listed companies (by total asset), 1998–2012
Fig. 3.4 Equal-weighted monthly portfolio returns versus ROIC
Fig. 3.5 Value-weighted monthly portfolio return versus ROIC
Fig. 3.6 Cumulative returns of various portfolios from May 1999 to April 2012
Fig. 3.7 Cross-industry and within-industry ROIC in China: 1998–2012 76
Fig. 4.1 COSCO share price versus the Shanghai composite index: June 29, 2007–June 28, 2013
Fig. 4.2 COSCO’s pre-tax ROIC: 2008–2012 86
Fig. 4.3 ROIC by ownership 99
Fig. 5.1 ROE histogram of China’s listed companies: 1999 to 2005
Fig. 5.2 An illustrative pyramidal structure 120
Fig. 5.3 The Fosun Group in 2009 126
Fig. 6.1 Debt-equity ratio and the number of affiliates of chaebols 136
Fig. 6.2 Chinese listed companies’ business segments, 2004–2010 140
Fig. 6.3 ROIC and the number of business segments 141
Fig. 6.4 The stock price of Kunlun Energy: Nov. 2007–Nov. 2011
Fig. 6.5 Pre-tax ROIC of Kunlun Energy: 2009–2011
143
144
Fig. 6.6 Strategic control map, 2010 146
Fig. 6.7 The ROIC analysis of CRE, Wal-Mart, and Colruyt, 2010
Fig. 6.8 The ROIC analysis of CRE, Qingdao Beer, and Yanjing, 2010
Fig. 7.1 The relationship between the NERI index and discount factor at province level: private firms in China
Fig. 7.2 The relationship between the NERI index and discount factor at province level: SOEs in China
Fig. 7.3 Local investment efficiency versus local government debts
150
151
159
160
165
Fig. 8.1 Alibaba’s ROIC: 2011–2015 199
L IST OF T ABLES
Table 1.1 Top 10 listed companies in the USA and China’s A-share market 8
Table 3.1 Value-weighted annualized abnormal returns (α) based on different asset pricing models, May 1999–December 2012 72
Table 3.2 Equal-weighted annualized abnormal returns (α) based on different asset pricing models, May 1999–December 2012 74
Table 5.1 Pyramidal structure of Chinese listed firms: 2001–2008
Table 6.1 Kunlun energy’s acquisitions in 2009 and 2010
Table 7.1 Differences between local debt rate and treasury rates (June–September 2014)
I always count myself as a lucky one. Born in 1970, by the end of the first ten years of my life, China’s paramount leader Deng Xiaoping initiated the economic reform and open-door policies. In the second ten years of my life, an entrepreneurial wave redefined the Chinese economy. The household responsibility system was introduced, which unleashed millions of individuals’ productivity. Millions of township and village enterprises (TVEs) were established. China’s private sector took off—Zhang Ruimin, Liu Chuangzhi, Ren Zhengfei, and Lu Guanqiu, with little business experience, respectively set up Haier, Legend (later changed to Lenovo), Huawei, and Wanxiang during the 1980s. After a short period of political turmoil and economic stagnation, Deng Xiaoping’s “southern China tour” in 1992 heralded a new round of economic reform as well as China’s second entrepreneurial wave—this time, many well-educated people left academics or government to start their own businesses.1 During the 1990s, the Chinese government also began reforming the state-owned enterprises (SOEs) and opened stock exchanges in Shanghai and Shenzhen.
By the time I reached my 30s, China joined the World Trade Organization (WTO) in 2001, opening up to international business. Many internet pioneers had ridden the technological innovation wave and set up their own internet companies. Most failed. But the few who survived flourished and later developed into China’s IT giants such as Alibaba, Tencent, Baidu. dom, and JD.com. In the first decade of the twenty-first century, while international trade skyrocketed, China also welcomed its property market boom that lasted for more than ten years. The soaring property price profoundly changed the structure of the Chinese economy, as well as the
behavioral pattern of local governments. While the boom had contributed significantly to China’s GDP growth, it also planted the seeds of various risk factors that are now threatening China’s long-term prosperity.
As I approached my 40s, I settled down in Beijing in 2010. China became the world’s second largest economy and overtook the USA to become the world’s largest manufacturer, accounting for almost a quarter of the world’s total manufacturing value-added.
Unlike my parents, whose lives had been filled with vicissitudes associated with economic stagnation due to ideological conflicts and political instability, I enjoyed an extraordinary increase in living standards in the first four decades of my existence. I experienced first-hand how the marketoriented development approach had delivered required growth to turn the Middle Kingdom into a most dynamic economy. Over the past three and a half decades, China has maintained a double-digit GDP growth rate every year. The whole country was like a huge construction site—skyscrapers were rising and cranes loomed large everywhere. Between 2011 and 2013, China used more cement than the USA had used in the entire twentieth century (6.5 gig tons vs. 4.5 gig tons).2 The results, of course, were also impressive. Since economic reforms began in the late 1970s, China has lifted 620 million people, half of its population, out of poverty.3
Along the way, I also felt the excitement due to the surge of Chinese companies. Now, China boasts of more than 20 percent of the world’s largest companies (by sales), based on the 2015 list of the Fortune Global 500 companies. China has become the world’s largest automobile and home appliances maker, as well as the largest consumer. In the meantime, wealth has grown explosively. In Beijing alone, there are 101 billionaires, according to Forbes’ 2015 China rich list.4 Across the shopping malls or outlets in Paris, London, and New York shuttle Chinese tourists with various dialects, talking on their iPhones, carrying their Chanel bags, and wearing their Prada shoes. Like a dream, things that had taken more than 300 years to happen in the western world became a reality in China in just slightly more than 30 years. China has developed so fast economically that many of us have started taking long-term growth for granted.
Over time, other ways of looking at the Chinese economy and Chinese companies have emerged. As I approach my 46th birthday, something seems to have gone wrong. Many of the factors that have led to China’s mysterious economic rise are no longer working their magic: the once abundant labor force is aging and no longer cheap, the forces of globalization are in retreat, credit-fueled investments have resulted in a pile-up of
corporate debt and overcapacity everywhere, and the once strong faith in long-term prosperity by Chinese entrepreneurs and corporate founders is eroding. The underlying rate of economic growth is beginning to slow. In 2015, China’s national output grew only 6.9 percent, below 7 percent for the first time since 1991. Skepticism about the sustainability of China’s economic growth is mounting. It has become a consensus among policymakers and corporate executives that China desperately needs to accomplish the transition of its economic growth model from investment-led to consumption- and services-driven before it gets too late.
The ongoing economic transition poses many challenges for those national champions in China’s corporate sector. The structural problems, which have long been camouflaged by rapid economic growth, are surging onto the scene. The investment spree that lasted for 35 years has created many corporate behemoths. However, most of them are debt-laden and fail to deliver reasonable returns. For example, even though China has become the world’s largest auto maker, the profit harnessed by its homegrown brands is less than 5 percent.5 Out of 98 Fortune Global 500 companies from mainland China in 2015, 12 reported net losses; one of them, Sinosteel, even failed to honor its debt. As the world’s largest manufacturer, most Chinese manufacturing firms compete fiercely in the low-end segments of the value chain. China-made products can hardly escape the perception that China is still about cheapness and copycats. On top of all this, some variant of the same question has been repeatedly raised: Does China have great brands and great companies? Indeed, the world is yet to see the birth of some truly great Chinese companies.
Companies, the “little republic” as Peter Drucker calls them,6 are micro-foundations of an economy. Only when the micro-foundations exhibit a strong capability of creating value can the aggregate economy grow in a healthy and sustainable way. Recall the growth identity: Growth rate = Investment rate × Return on Invested Capital (ROIC), which says that both investment rate and ROIC can drive growth. Nevertheless, China’s ongoing economic transformation calls for a shift of the growth driver from investment rate to ROIC. Only in this way can the Chinese economy accomplish its long overdue metamorphosis (from quantity growth to quality growth). To raise ROIC at the aggregate economy level, the micro-units of the Chinese economy—Chinese companies—need to put value creation far ahead of aggressive pursuit of operation scale.
The Chinese economy is now faced with the onset of a seemingly permanent slowdown. Pessimists are already predicting a long period
of stagnation, reminiscent of Japan’s lost decade. Will it happen? What should we do to prevent it from happening? Intense worries make people rush to economists for answers. Unfortunately, most economists are still busy debating what macroeconomic policies might be appropriate to absorb excess capacity and inventory and lower overriding corporate debt. For the few who have coined the term “the supply side structural reform,” they are also failing horribly because they only create an ambiguous term that leads to no meaningful and implementable policy suggestions. It may even mislead people’s discussions about the real issues. No matter how the narratives change, the nature of the structural problems facing China has been the same: The Chinese economy needs to improve its capital efficiency because economic growth thriving on a massive use of debt simply cannot be sustained. When the economy goes underperforms, people tend to hold lower respect for economists, for reasons—there has been a huge gap between what they do and what people expect them to do.
As an economist myself, I try to provide an intellectual framework to understand what has been going on. To me, the answer is extremely simple and straightforward—China needs to breed a large number of great companies that can maintain high ROIC for a long enough time. Only with such companies around every corner can micro-foundations of the Chinese economy be fixed and enduring growth be achieved. Of course, my narrative immediately leads to many unanswered questions: Why are there big but few great companies in China? Why is it important to have great companies? What external or internal factors are constraining the surge of great companies in China? What rules can make Chinese companies truly great? How can we fix the foundations of the Chinese economy to ensure its sustainable growth?
I will address all these questions in this book.
THE SURGE OF CORPORATE CHINA
The surge of corporate China did not happen until the late 1990s. In 20 years, the number of Fortune Global 500 firms from mainland China has increased from 2 in 1996 to 98 in 2015. If I include the companies located in Taiwan and Hong Kong, the number is 106.7 This is a great achievement China has accomplished during the first stage of its reform era and, by all means, marvelous. Several features characterize mainland China’s Fortune Global 500 companies. First, the majority of them are state owned. Out of the 98 mainland companies on the 2015 Fortune Global 500 list, only ten
are private. The three largest companies in China, Sinopec, PetroChina, and State Grid, which are also among the world’s ten largest companies by sales, are all central government-controlled SOEs. Second, 60 percent of China’s large firms come from the financial services and resources sectors. Among the ten most profitable companies in the world, four are from China and all of them are the state-owned banks dubbed “Big 4.” Third, 12 out of mainland China’s 98 Fortune Global 500 companies reported net losses in 2015—these corporate behemoths are very big but not that profitable.
In Chap. 1 of this book, I explore the structural factors that account for the quick surge of Chinese companies: investment-led growth model, government policies, and external environment in their favor. The economic expansion in China has been driven by fixed-asset investments. The rapidly expanding economy experiencing a persistent investment boom has strong demand for production factors such as resources and capital, which are still monopolized by the state. Strong demand, together with state monopoly, gave birth to big state-owned companies in the resources and financial services sectors.
In the mid-1990s, China shifted the focus of reform to the urban areas. To promote operating efficiency of the state-owned enterprises (SOEs), the government has adopted the so-called grasp the big and let go of the small strategy to consolidate SOEs through mergers, acquisitions, divestitures, and, oftentimes, outright shutdowns. The SOEs’ reform facilitated the surge of a number of large companies. Nowadays, the central government only directly controls slightly more than 100 SOEs, half of which have been listed as Fortune Global 500 companies.
China’s WTO accession in 2001 is another facilitator. During the first decade of the twenty-first century, annual export growth rate had been over 20 percent in most years, and total exports accounted for over 30 percent of China’s GDP, thanks to the lower tariff rates. The Chinese economy and Chinese firms are beneficiaries of global trade liberalization. Strong exports also led to a pile-up of foreign exchange reserves, which once reached $4 trillion. The deep base of foreign exchange reserves allowed the Chinese firms, state-owned or private, to aggressively pursue foreign targets through cross-border acquisitions. For example, Geely, a privately owned auto maker in Zhejiang, acquired Volvo in 2011 and became one of the Fortune Global 500 companies in 2012.
However, not all big companies are great. Firm size captured by sales is not the measure of firm value. Chalco8 reported a net loss of $1.76 billion
in 2015. Sinosteel and many other government-controlled steel and iron groups are on the brink of bankruptcy. These large companies surely contribute to GDP, but they do not generate much value.
To sustain future growth, it is important for China to strike a new balance between investment rate and ROIC. While maintaining a 50 percent of fixed-asset investment to GDP ratio becomes increasingly impossible, improving firm-level ROIC seems the only way out. Based on the four different combinations of the values (high or low) of the two variables driving growth, I conjure up in Chap. 1 four potential end scenarios of the Chinese economy.9 Whether China can successfully escape the worst scenario—“the mid-income trap”—which corresponds to a permanent economic stagnation resulting from a combination of low investment rate and low ROIC, hinges on whether the aggregate ROIC could be significantly improved. Enhancing ROIC at the aggregate level calls for the micro-foundations of the Chinese economy, Chinese companies, to improve their capital efficiency significantly.
In Chap. 2, I provide a corporate finance version of the definition of great companies, “Great companies are those that can maintain higher return on invested capital (ROIC) for a long enough time.” This definition is analogous to those raised in Built to Last and Creative Destruction in the sense that they all emphasize an indispensable feature of the great companies: Great companies have to first create value consistently and persistently. In my narrative, the greatness of a company derives from its business model innovation, and is embodied in its sustainably high ROIC.
Does ROIC apply to Chinese companies? As an empirical economist, I resort to the large data on China’s listed companies and techniques developed in the empirical finance literature. I find, in Chap. 3, that trading strategies designed around ROIC can generate alpha—the secret source of value in capital market investment. Specifically, a hedge strategy with a long position of stocks with higher ROIC and a short position of stocks with lower ROIC can generate a risk-adjusted abnormal return as high as 20 percent. In addition, I show that investing in the top quintile of the listed companies (by ROIC) can generate an annualized return as high as 13.2 percent from 1998 to 2012, which is on par with China’s nominal GDP growth over the same time period. While ROIC indicates a firm’s fundamentals, I find that the average ROIC of the universe of China’s listed companies during 1998–2012 was only 3 percent, far smaller than that of their US counterparts. Clearly, there is a paucity of quality companies (i.e., companies with high ROIC) in China.
WHY ARE THERE BIG BUT FEW GREAT COMPANIES IN CHINA?
What factors, external or internal, are preventing the Chinese companies from putting value ahead of operation scale? Chapter 4 of the book explores two external factors: the investment-led growth model and weak institutional infrastructure.
Several features characterize China’s economic rise, among which high investment rate stands out. With persistently high investment rate, the economy has strong demand for resources and capital. However, the resources and finance industries are still dominated by SOEs. Because of the moral hazard problems and the soft budget constraints faced by SOEs, investments by SOEs are not as efficient as those by private firms. In Chap. 4, I analyze the cross-ownership distribution of ROIC and find that SOEs on average have ROIC 4 to 6 percentage points lower than that of nonSOEs.10 In the meantime, China’s state-dominated financial system allocates most banks lending to the state sector, which squeezes the private companies and makes it difficult for them to grow bigger. As such, we see many large SOEs but very few companies with high ROIC in China. The very factors that make the Chinese companies big are also the factors that prevent them from being truly great. The spirit is vividly epitomized in the lyrics of Lou Reed’s “A Perfect Day,” “You are going to reap just what you sow.”
China has been practicing a financial repression policy during its reform era. This is reflected in the following aspects: The financial system is dominated by the state-run banks; the interest rates are regulated; and the barriers of entry to finance are extremely high for private capital. The state-owned banks are incentivized to allocate disproportionate amounts of funds to SOEs, which gives birth to large firms, but not great firms. The problem can be best illustrated by applying the following principle: ROIC ≥ WACC, where WACC is shorthand for weighted average cost of capital. An investment generates value if and only if this inequality holds. Due to inefficient financial intermediation, WACC perceived by SOEs and local governments is likely lower than the market rate or the rate applied to private companies. Perceiving a much lower WACC, SOEs and local governments likely over-invest, while more efficient private firms may under-invest.
Another fundamental problem associated with China’s institutional infrastructure is the lack of an open and integrated domestic market. As
discussed in Chap. 4, during China’s reform era, China has been sufficiently open to the outside world. But the domestic market is still segmented, due to the political tournament based on economic performance. Regional competition leads to regional protectionism, which significantly increases the cost of cross-region transactions. Without a level playing field, market competition likely only creates winners that are better at seeking rents than generating value.
Over the past three and a half decades, China invested heavily in infrastructures such as expressways, high-speed railways, and airports. It is now time for China to invest in its institutional infrastructure.
Poor corporate governance practice is an internal factor explaining the lack of great companies in China. I attack this issue in Chap. 5. Corporate governance problems arise because of agency problems. In general, the corporate governance mechanisms used by Chinese firms are not effective enough to resolve very sophisticated and twisted agency problems among Chinese companies. There is plenty of evidence showing that poor governance is associated with lower ROIC. Clearly, to have great companies, improving corporate governance practices is a must. Drawing from my own research, I zero in on the weakest link in Chinese firms’ governance practices—the widespread use of pyramidal ownership structure. I provide robust evidence that obsession with building corporate pyramids could be very effective in forging corporate colossuses, but does not help improve ROIC at all.
The myth on diversification is another internal factor explaining the lack of great Chinese companies. Diversification has been a popular strategic choice for many Chinese Companies. Does diversification lead to higher ROIC? Thanks to the recent explosion in data availability and computing power, I can use the data on the Chinese listed companies to address this issue. Chapter 6 provides empirical results and two prominent case examples (Kunlun Energy and China Resources Enterprise (CRE) respectively) to showcase the value effect of diversification. My analysis shows that there is a negative correlation between firm-level ROIC and the extent of diversification, suggesting that value-minded companies in general should stay focused. Of course, diversification may still work for companies with superior organizational capital and management skills (i.e., General Electric) or companies with unusually talented founders who have broader vision and sharp minds on technology and business model innovation (i.e., Alphabet and Alibaba). But it does not apply to an average Chinese company. The case analysis of both Kunlun Energy and CRE yields the same conclusion:
Staying focused generates more value. Misconceived corporate strategy should be held responsible for the abundance of big companies but the lack of great companies in China.
HOW CAN CORPORATE CHINA RISE TO GREATNESS?
How can the Chinese companies rise to greatness? To cultivate great companies, China needs to first lay down solid institutional foundations. Chapter 7 points out that the enabling institutions should have three building blocks: redefining the economic role of the government, enhancing the efficiency of financial intermediation, and seeding a culture of innovation and entrepreneurship. What roles should the government play in economic development? I attack this issue head on. I admit that the heavy involvement of the government in economic affairs has been one important contributing factor to China’s economic success in the first stage of its reform era. State planning and government spending have built the infrastructure indispensable for China’s industrialization and economic takeoff. The state involvement even set the stage for innovation. For example, the rise of China’s e-commerce had benefited tremendously from the telecommunication network, the highway system, and the highspeed railways built by the state. In addition, the state has committed large amounts of resources to drive innovations in many crucial areas, which private companies alone cannot commit.
However, it is important to bear in mind that China is entering a new stage of economic development, during which capital efficiency and business model innovations are much more important. Governments at all levels should thus adjust their roles and make efforts to transform themselves from participants in economic activities to rule-setters and public service providers, whose main responsibility is to develop and maintain level playing fields.
On the second point, deregulating interest rate and allowing private capital to enter the financial services sector are the key to rejuvenating the financial system in China. Only when capital can be allocated more efficiently can firm-level ROIC be improved. As such, China needs a new generation of financial system, which I call “Finance 2.0.” The new finance should channel the funds from savers to end-users in simple, direct, and effective ways.
The Chinese economy has benefited tremendously from unleashing individuals’ creativity, to which China’s reform experiences in the 1980s
and 1990s attest. The most feasible source of future economic growth is the improvement of total factor productivity. To achieve this, China needs to create a fair, equitable, and transparent business atmosphere, protect and acknowledge the seemingly trivial attempts by numerous individuals, seed the culture of innovation, and inspire entrepreneurship.
Great companies are created by great minds. China’s great companies will surely arise from those who are brave enough to disrupt the incumbents through technology and business model innovations, hold deep respect for the market and customers, and aim at creating long-term value rather than short-term gains. In Chap. 8, I discuss four promising candidates that have lined up to join the small elite club of truly great companies: Huawei Technologies, Alibaba Group, Xiaomi.dom, and SF Express. They have very different business models and compete in different industries. Huawei is a telecommunication equipment provider and is now also involved in consumer business; Alibaba is the world’s leading e-commerce platform with a wide range of investments in almost everything; although it sells more than 60 million smartphones every year, Xiaomi perceives itself as a mobile internet company; and SF Express is China’s leading private delivery company. Despite the fact that the four have very different corporate culture and provide differentiated products and services, they share one thing in common: Their business models and business practices can be traced back to one unifying theme—creating value by aggressively pursuing higher ROIC.
I hope that the end result of this book is that it provides an intellectual framework, strongly supported by both empirical and anecdotal evidence, which can help the Chinese companies rise to greatness. In Chap. 9, I summarize findings in the book by highlighting eight must-does.
CHINA NOW
At one time, the rise of the Chinese economy seemed unstoppable. Now the old growth model, which relies heavily on state planning and huge investment in infrastructure and property, and thrives on a massive use of debt provided by the state-dominated financial system, is running out of steam. The success of China’s economic transformation hinges on whether its micro-foundations can be fixed. Much can be gained if we can draw the right lessons from the past economic success in China and start to tackle the structural problems that have shackled the Chinese people’s entrepreneurial spirit. I lay down the challenges that confront
us in this book, with the hope that our collective efforts can help us overcome their constraints.
Finally, despite all the suspicions people have held about the Chinese economy, the picture is not all gloom. There are plenty of reasons to be hopeful. Although the annual GDP growth rate has dropped to below 7 percent, it still represents more economic output than the 14 percent in 2007 simply because the economy has become much larger. More importantly, over time, we are seeing the rise of new breeds of companies in China. Those highly disruptive ones are more aggressively using new technologies such as mobile internet to challenge inefficient incumbents. They are global in outlook, more willing to take risks, and more skilled in capital market maneuvering. They can take full advantage of the potentials of new technology and deliver not only better manufacturing goods but also increasingly sophisticated quality services. They are the hope of China’s great companies.
In November 2012, I flew to Lima, the capital city of Peru, to attend the annual meeting of the Partnership in International Management (PIM), a consortium of leading international business schools. On behalf of the Guanghua School of Management at Peking University, I joined the discussions with representatives from more than 50 business schools around the world on a wide range of issues, mostly on the new challenges facing business schools and business education. It was the first time that I had been to Latin America. To me, Latin America is an exotic and mysterious continent epitomized in Gabriel Garcia Marquez’s One Hundred Years of Solitude. Although I knew that the town of Macondo in the novel is a metaphor for Colombia, not Peru, walking on the streets of Lima and passing by those storied buildings, I still felt strongly a sense of magical realism. Peru had just experienced an average of 6 percent of GDP growth over the past five years. It seemed that the country was pulling out of years of turmoil and stagnation and economic growth issues were what the current Peruvian government was most concerned with.
China and the Chinese firms were the most popular topics at the 2012 PIM annual conference. Participants were curious to know how to account for the rise of the Chinese economy and what the rise implied for the rest of the world. The surge of the Chinese economy has stemmed from the entrepreneurial spirit by the corporate executives and founders which had been unleashed due to China’s reform and open-up polices. Their success and failure stories have gradually become the subjects of business research and case materials used in business school teaching, and
enlighten entrepreneurs and business leaders elsewhere. After three and a half decades of economic development, China has transformed from an impoverished country to the world’s second largest economy.
During my short stay in Lima, I had a chance to catch a glimpse of Peru’s storied history. I was told that slavery was not abolished in Peru until the1870s. And the precondition for the abolishment of slavery, as raised by slave owners, was that they could use “coolies” from China as substitutes.
Nowadays, walking on the streets of Lima, one can easily spot advertising boards of Chinese companies such as Huawei Technologies and Dongfeng Automobile. One can feel that local people do hold respect for Chinese companies. This is a big difference between the past and the present for China. Indeed, what can really bring to a nation widespread respect are great products, great companies, great thinkers, and great ideas. While Chinese companies have successfully achieved their first Long March and risen rapidly on a global scale, I expect that those with a broader vision and more entrepreneurial spirit will continue to power ahead and become world-class companies. I am hopeful that this will happen!
NOTES
1. For example, Chen Dongsheng of Taikang Life Insurance and Guo Guangchang of Fosun Group.
2. See http://www.gatesnotes.com/About-Bill-Gates/Concrete-in-China.
3. The Economist, “Just a little bit richer,” April 4, 2015.
4. Billionaires refer to households with wealth over $1 billion (approximately RMB 6.4 billion).
5. See Chap. 2 of the book for more discussion on China’s auto industry.
6. Cited in “The Company: A short history of an evolutionary idea” by John Micklethwait and Adrian Wooldridge in 2003.
7. Fortune magazine ranks the world’s 500 largest companies based on their total sales in the previous year.
8. Shorthand for Aluminum Corporation of China Limited.
9. See Fig. 1.2 of Chap. 1
10. See Liu and Siu (2011).
CHAPTER 1
The Improbable Surge of Corporate China
In 1984, Liu Chuanzhi, a research scientist from the Institute of Computing Technology at the Chinese Academy of Science (CAS), decided to venture into the business world. With the help of ten other colleagues, he set up a technology company in Zhongguancun, a district where most national research institutes are located.1 They managed to put together RMB 200,000 as the initial investment. Liu’s goal was humble—he wanted to develop a system to speed up typing Chinese characters on computers and, if possible, make some money. It was probably beyond Liu’s wildest dreams that his small company would one day develop into one of China’s most successful technology companies. The company, later known as Lenovo, was ranked as the world’s 231st largest company (by sales) by Fortune magazine in 2015. It not only boasts of the world’s largest PC market share, but has also developed a solid footing in areas such as smartphones, tablets, Big Data, cloud computing, private equity, venture investment, and agriculture. Lenovo was a fully homegrown company prior to its acquisition of IBM’s PC unit in 2005. As of 2015, both overseas assets and sales had exceeded 50 percent and non-Chinese executives account for more than half of Lenovo’s senior executives. Lenovo has been widely viewed as the most market-oriented and most international company in China.2
In 1980s, Ren Zhengfei, a former army officer in his 40s, relocated to Shenzhen to explore his luck. After a few failed attempts, he founded Huawai Technologies in 1988. In less than 30 years, Huawai has become the world’s leading information and telecommunication equipment provider, exporting products and services to more than 150
Pio VII, Barnaba Chiaramonti, di Cesena 1800 23 5 6
Leone XII, Annibale della
Genga, di Spoleto 1823 5 4 13
Pio VIII, Francesco
Saverio Castiglioni, di Cingoli 1829 1 8 »
Gregorio XVI, Mauro
Capellari, di Belluno 1831 15 4 »
Pio IX, Gianmaria dei conti Mastai-Ferretti, di
Sinigaglia 1846
§ 6. — Imperatori e re d’Italia.
Carlo Magno re dei
Longobardi 774 incoronato imperatore 800 o 799 25 xbre 914
Pepino re d’Italia 781 810
Bernardo re d’Italia 810 818
Luigi o Lodovico il Pio associato all’impero 813, re 818 840
Lotario associato dall’817 820 855
Luigi II associato dall’849 855 875
Carlo il Calvo imperatore e 875 877
re
Carlomanno re d’Italia 877 879
Impero vacante 877 881
Carlo il Grosso re 879, imperatore 881 887
Guido da Spoleto re 889, imperatore 891 894
Berengario I re 888, imperatore 915 924 Lamberto imperatore e re 894 898
Arnolfo imperatore e re 896 899
Luigi III re 899, imperatore 901 903 o 905
Rodolfo di Borgogna re 922 926 Ugo re 926 947
Lotario associato dal 931, re 947 950
Berengario II e Adalberto, re 950 961
Ottone I re 961, imperatore 962 973
Ottone II imperatore 973, re di Germania 962 983
Ottone III imperatore 996 983 1002
Enrico II imperatore
Corrado II Salico imperatore
re di Borgogna
Enrico III imperatore 1046
Enrico IV imperatore 1053
Enrico V imperatore
Federico
Enrico VI
Castiglia
Rodolfo I
d’Habsburg 1273 1291
Adolfo di Nassau 1292 1298
Alberto I d’Austria 1298 1308
Enrico VII di Luxemburg imperatore 1312 1308 1313
Luigi V il Bavaro imperatore 1328 1314 1347
Federico III il Bello 1314 abd 1325
Carlo IV di Boemia imperatore 1355 1347 1378
Venceslao 1378 dep. 1400 m. 1419
Roberto 1400 1410
Josse 1410 1411
Sigismondo imperatore 1433 1410 1437
Alberto II, d’Austria come i successivi 1438 1439
Federico III imperatore 1452 1439 1493
Massimiliano I 1493 1519
Carlo V 1519 abd. 1556 m. 1558
Ferdinando I 1556 1564
Massimiliano II 1564 1576
Rodolfo II 1576 1612
Mattia 1612 1619
Ferdinando II 1619 1637
Ferdinando III 1637 1657
Interregno di 15
mesi.
Leopoldo I 1658 1705
Giuseppe I 1705 1711
Carlo VI 1711 1740
Interregno di 6 mesi.
Carlo VII d’Hannover 1742 1745
Maria Teresa e Francesco I di Lorena 1745 1765
Giuseppe II 1765 1790
Leopoldo II 1790 1792
Francesco II 1792 1835 che nel 1806 rinunzia al titolo d’imperatore romano, e così l’impero si scioglie
§ 7. — Re ostrogoti.
Teodorico 493 526
Atalarico 526 534
Teodato 534 536
Vitige 536 dep 540 m 543?
Eldibaldo o Teodebaldo 540 541
Erarico 541
Totila (Baduilla) 541 552
Teja 552 553
I Greci, guidati da Narsete, rimangono padroni dell’Italia nel 554
§ 8. Esarchi di Ravenna.
Narsete, duca d’Italia 554 568
Longino, primo esarca 568 584
Smaragdo 584 590
Romano 590 597
Callinico 597 602
Smaragdo di nuovo 602 611
Lemigio 611 616
Eleuterio 616 619
Isacco 619 638
Platone 638 648
Teodoro I Calliopa 648 649
Olimpio 649 652
Teodoro Calliopa di nuovo 652 666
Gregorio 666 678
Teodoro II 678 687
Giovanni Platino 687 702
Teofilace o Teofilatto 702 710
Giovanni Rizocopo 710 711
Eutichio 711 713
Scolastico 713 727
Paolo 727 728
Eutichio di nuovo 728 752
Astolfo longobardo pon fine all’esarcato nel 752
§ 9. Re longobardi.
Alboino, vincitore de’
Gepidi, chiamato da
Narsete in Italia 568 573
Clefi 573 575
Governo dei 30 duchi 575 584
Autari 584 590
Agilulfo 591 615
Adaloaldo 615 dep. 625 m. 626
Ariovaldo 625? 636
Rotari 636 652
Rodoaldo 652 653
Ariberto I 653 661
Gondiberto e Pertarito 661 662
Grimoaldo 662 671
Garibaldo 671
Pertarito rimesso in trono 671 686
Cuniberto il Pio, associato dal 678 686 700
Luitperto o Liutperto 700 701
Ragimperto 701
Ariberto II 701 712
Ansprando 712
Liutprando o Luitprando 712 744
Ildebrando, assoc. dal 736 744
Rachi 744 abd. 749
Astolfo 749 756
Desiderio 756
Adelchi o Adelgiso associato v 759 m 788
Carlomagno s’impadronisce del regno dei Longobardi nel 774.
§ 10. — Duchi del Friuli.
Grasolfo I 568 590
Gisulfo 590 611
Grasolfo II 611 621
Tasone e Cacone 621 635
Grasolfo II di nuovo 635 651
Alcuni cronologi mettono
Gisulfo 568 615
Tasone e Cacone suoi
figli 615 635
Grasolfo fratello di Gisulfo 635 651
Agone 651 663
Lupo 663 666
Varnefrido 664
Vettari 666 678
Laudari 678
Rodoaldo, Ansfrido, Adone 694
Ferdolfo ligure 694 706
Corvolo 706
Pemmone bellunese 706 737
I suoi figli Rachi e Astolfo re dei Longobardi 737 749
Anselmo, loro fratello 749 abd 751 m 803
Pietro 751 775?
Rodgaudo 775 776
Marcario (Marquard) 776
Unrico (Hurok) I 799
Cadaloaco 799 819
Bodrico o Balderico 819 846
Everardo 846 868?
Unrico II suo figlio 868 874
Berengario (re d’Italia, 888) 874 878 m. 924
Gualfredo 878 895
Grimoaldo 895 922
Enrico III, fratello di Ottone Magno 922 952
Non appajono più duchi del Friuli.
11. — Duchi di Spoleto.
Ariulfo 601 602
Teodolapio 602 650
Attone 650 665
Trasimondo I 675 703
Faroaldo II 703 724
Trasimondo II 724 740
Ilderico 740 741
Ansprando 741 746
Lupo o Lupone 746 757
Alboino 757 758
Gisulfo 759 763
Teodorico o Teodicio 763 773
Ildebrando 773 789
Vinigiso 789 822
Suppone I 822 824
Adalardo, Mauringo, Berengario 824 838
Guido I 838 866
Lamberto I 866 871
Suppone II 871 879
Guido II 879 880
Guido III (re d’Italia, 889) 880 891 m. 894
Lamberto II 891 898
Guido IV 898
Agiltrude, Anonimo, Alberico 898 926
Teodobaldo I 926 935
Anscario 935 940
Sarilone 940 943
Umberto 943 946
Bonifazio I e Teodobaldo II 946 959
Trasimondo III 959 967
Pandolfo Testa di ferro 967 981
Trasimondo IV 982 989
Ugo I il Grande 989 1001
Bonifazio II 1001 1012
Giovanni, Ugo II 1012 1030
I duchi di Spoleto diventano governatori, mutabili ad arbitrio degli imperatori e re d’Italia
§
12.
— Duchi, poi principi di Benevento.
Zottone 571 o 589 591
Arigiso o Arechi I 591 641
Ajone I 641 642
Rodoaldo 642 647
Grimoaldo I (re de’
Longobardi 662) 647 667 m 671
Romoaldo I 667 683
Grimoaldo II 684 686
Gisulfo I 686 703
Romoaldo II 703 729
Gisulfo II 729 731
Andela 731 733
Gregorio 733 740
Godescalco 740 741
Gisulfo II ristabilito 741 747?
Liutprando 747 758
Arigiso II, principe nel 774 758 787
Grimoaldo III (o I) 787 806
Grimoaldo IV (o II) 806 827
Sicone 827 833
Sicardo 833 840
Radelgiso I 840 851
Radelgario 851 853
Adelgiso 853? 878
Gaideriso 878? 881
Radelgiso II 881 884
Ajone (II) 884 890
Orso 890 894
Guido (IV duca di Spoleto) 894 896
Radelgiso II ristabilito 896 900
Atenolfo I 900 910
Landolfo I e Atenolfo II 910 943
Landolfo II e Landolfo III 943 961
Pandolfo I 961 981
Landolfo IV 981 982
Pandolfo II 982 1012
Landolfo V 1012 1033
Pandolfo III 1033 1053
Landolfo VI 1038 1053
Rodolfo 1053 1054
Pandolfo III e Landolfo
VI di nuovo 1054 1077
Pandolfo abdica, e Landolfo gli
sostituisce suo figlio
Pandolfo IV 1059 1074
Fine de’ principi longobardi di Benevento.
§ 13. — Conti e duchi di Puglia e Calabria.
Guglielmo I conte 1043 1046
Drogone 1046 1051
Umfredo 1051 1059
Roberto Guiscardo duca 1059 1085
Ruggero 1085 1111
Guglielmo II 1111 1127
§ 14. Conti e re delle Due Sicilie.
Ruggero I conte di Sicilia 1061 o 1074 1101
Ruggero II 1101
s’impadronisce della Puglia 1127
re di Puglia e Sicilia col nome di Ruggero I 1130 1154
Guglielmo I il Malo 1154 1166
Guglielmo II il Buono 1166 1189
Tancredi conte di Lecce 1189 1194
Guglielmo III 1194 1195
Enrico VI (o I) di Hohenstaufen 1194 1197 marito di Costanza, morta nel 1198
Federico I, II come imper. 1197 1250
Corrado 1250 1254
Corradino 1254 1258
Manfredi 1258 1266
Carlo I d’Anjou 1266 1285 perde la Sicilia nel 1282.
Re di Sicilia.
Pietro d’Aragona 1282 1285
Giacomo 1285 1295
Federico I (o II) re di Trinacria 1296 1337
Pietro II 1337 1342
Lodovico 1342 1355
Federico II (o III) il Semplice 1355 1377
Maria 1377 1402
Martino I 1392 1409
Martino II 1409 1410
Ferdinando I di Castiglia 1412 1416
Alfonso I d’Aragona, ottiene anche il regno di Napoli 1416 1458
Giovanni I 1458 1479
Ferdinando II il Cattolico, anche re di Napoli come Ferdinando III 1479 1516
Re di Napoli contemporanei a quelli.
Carlo II il Zoppo 1285 1309
Roberto (II) il Savio 1309 1343
Giovanna I 1343 1381
Luigi di Taranto 1352 1362
Carlo III[150] 1381 1386
Ladislao 1386 1414
Giovanna II 1414 1435
Renato d’Anjou 1435 1442
Alfonso I d’Aragona 1442 1458
Ferdinando I 1458 1494
Alfonso II 1494 1495
Ferdinando II 1495 1496
Federico II 1496 1501
Ferdinando III (già II di Sicilia) 1504 1516
Carlo V come imperatore, IV di Napoli, II di Sicilia, I di Spagna 1516 1554
Filippo I, II di Spagna 1554 1598
Filippo II, III di Spagna 1598 1621
Filippo III, IV di Spagna 1621 1665
Carlo V di Napoli, III di Sicilia, II di Spagna 1665 1700
Filippo IV, V di Spagna 1700 1707
Re di Sicilia.
Vittorio Amedeo di Savoja 1713
Carlo d’Austria, VI di Napoli nel 1707 e come imperatore 1720 o 1721
Re delle Due Sicilie della Casa di Borbone.
Carlo di Borbone figlio di Filippo V, III di Spagna, VII di Napoli 1735 1759
Ferdinando IV di Napoli, III di Sicilia 1759 dep. 1798
ristabilito 1802 dep 1805
Giuseppe Buonaparte re di Napoli e Sicilia, 30 marzo 1806
Gioachino Murat, 15 luglio 1808 ucciso 1815
Ferdinando suddetto è ristabilito col titolo di Ferdinando I re del regno delle Due Sicilie 1815 1825
Francesco I 1825 1830
Ferdinando II 1830 1859
Francesco II, 20 marzo 1859 spod 1860
§ 15. — Duchi di Parma e Piacenza.
Questi paesi formarono parte del ducato di Milano, fin quando papa Paolo III li diede a suo figlio naturale Pier Luigi Farnese, primo duca 1545 1547
Ottavio 1547 1585
Alessandro 1585 1592
Ranuccio I 1592 1622
Odoardo 1622 1646
Ranuccio II 1646 1694
Francesco 1694 1727
Antonio 1727 1731
Estintasi coi tre precedenti fratelli la casa Farnese, Elisabetta, figlia di Odoardo e moglie di Filippo V di Spagna, seppe far toccare quel dominio a suo figlio don Carlo di Borbone 1731 1748
Don Filippo 1748 1765
Ferdinando 1765 1802
Luigi I 1802 1803
cede Parma e Piacenza alla Francia, ed ottiene la Toscana sotto il titolo di re d’Etruria
Carlo Luigi II 1803 dep. 1807
Maria Luigia d’Austria, imperatrice dei Francesi, duchessa di Parma 1815 1847
Carlo Luigi suddetto 1847 abd 1849
Carlo III 1849 1854
Roberto (Luigia di Borbone reggente), 27 marzo 1854 spod. 1859
§ 16. — Marchesi, duchi e granduchi di Toscana.
Bonifazio I (o II) marchese di Toscana 828 845
Adalberto I il Ricco 845 890
Adalberto II 890 917
Guido 917 929
Lamberto 929 931
Bosone 931 936
Umberto 936 961
Ugo il Grande 961 1001
Adalberto III 1001 1014
Riniero 1014 1027
Bonifazio II (o III) 1027 1052
Federico 1052 1055
Beatrice 1055 1076
Matilde 1076 1115 morendo, fa donazione alla santa Sede; ma Enrico V imperatore ne occupa i beni, e mette al governo della Toscana presidi e marchesi amovibili, che durano 1116 1133
Enrico l’Orgoglioso, investito duca di Toscana dall’imperatore
Lotario II 1133
Ingelberto, eletto vicario del duca
Enrico dal concilio Pisano, poi scacciato dai Lucchesi 1134 o 1135
ristabilito da Lotario II 1137
Ulderico, creato marchese di Toscana dall’imperatore Corrado III 1139 1153
Welfeste, fratello del duca Enrico, creato marchese dall’imperatore
Federico Barbarossa 1153 1195
Filippo, quintogenito del Barbarossa, eletto marchese dall’imperatore Enrico VI 1195
Cominciano le fazioni dei Guelfi e Ghibellini 1198
La Toscana si regge a repubblica fino al 1530
Allora Carlo V soggiogatala, vi pone duca Alessandro de’ Medici 1531 1537
Cosimo I de’ Medici 1537 ha il titolo di granduca di Toscana 1569 1574
Francesco Maria Medici 1574 1587
Ferdinando I 1587 1609
Cosimo II 1609 1621
Ferdinando II 1621 1670
Cosimo III 1670 1723
Gian Gastone 1723 1737
Estinta la linea medicea, vi è surrogato Francesco Stefano di Lorena 1737 1765
Un atto di Francesco I imperatore del 14 luglio 1765 stabilì che il granducato sarebbe una secondogenitura della Casa d’Austria. Perciò gli succede il secondogenito Leopoldo 1765
Essendo questo eletto imperatore di Germania nel 1790, succede nel granducato il suo secondogenito Ferdinando III 1790
Nella pace di Luneville 1801, il granducato è dato alla infante
Luigia di Parma.
Elisa Buonaparte è creata granduchessa di Toscana 1807
Ferdinando III ritorna 1814 1824
Leopoldo II 1824
che, per abdicazione del duca
Carlo Luigi di Lucca (1847) acquista anche questo ducato. È espulso nel 1859.
§ 17. — Duchi di Ferrara, Modena e Reggio.
La Casa longobarda dei principi d’Este si divise in due rami 1097; uno con Guelfo si stabilì in Germania, ove dominò il Brunswik-Luneburg, e salì al trono inglese; l’altro con Folco stette in Italia Borso, discendente da questo, fu da Federico II imperatore fatto duca di Modena e Reggio 1453 1471
Ercole I 1471 1505
Alfonso I 1505 1534
Ercole II 1534 1559
Alfonso II 1559 1597
Cesare d’Este 1597 1628 che nel 1598 perde il ducato di Ferrara.
Modena, come feudo imperiale, è data ad Alfonso III
