Summary of Key Points
This article compares the development paths of domestic and foreign companies: while domestic firms tend to form conglomerates to expand their scale, the world's top industrial giants are actively splitting up their businesses. In most cases, the market value of these split companies has significantly increased (for example, Western Data's market value soared by over 2000% after the split). The article uses examples of GE (forced to split due to a crisis) and Siemens (voluntarily downsizing) to explain the underlying reasons for these splits—internal conflicts and misallocation of resources within diversified conglomerates have outweighed the benefits of collaboration. It warns Chinese companies to avoid the misconception that becoming larger necessarily means becoming stronger, emphasizing the importance of genuine synergy and organizational management.
Detailed Analysis
1. Why are Global Giants Splitting Up? Four Unavoidable Truths
The issue is not that these giants don't want to grow; rather, the disadvantages of being large outweigh the advantages:
- Discounting Conglomerates: When diversified businesses are sold together, their value is undervalued by the market. Capital markets tend to underestimate the combined value of companies with both high-growth (such as AI and storage) and low-profit (such as hard drives) segments by 10%-30%. For instance, before Western Data split, its hard drive (a cash cow) and flash memory (highly profitable in AI) businesses were combined, leading to a decline in overall value during economic downturns. After the split, the hard drive business could be valued based on its stable cash flow, while the flash memory business benefited from the AI market's higher profits, boosting the company's total market value from 24 billion to 50.5 billion.
- Misallocation of Resources: Diversified conglomerates often allocate resources ineffectively, with high-growth segments (like AI) struggling for funding while mature sectors (such as traditional manufacturing) subsidize unprofitable units. With independent listings, each business can secure its own funding and planning without compromising the overall group's financial performance.
- More Internal Strains than Synergy: Bureaucratic red tape hinders innovation. Centralized decision-making processes and cross-departmental conflicts can stifle innovative initiatives. For example, an innovative idea in a European company might take too long to be implemented at the headquarters by the time it’s ready for market release, allowing Chinese companies with more agile decision-making to gain a competitive advantage.
- Rapid Technological Change: Large organizations struggle to keep up with rapid developments in AI and software-defined manufacturing. Their bureaucratic structures can become barriers to innovation and new opportunities.
2. Two Types of Splitting Strategies: Voluntary Downsizing vs. Forced Restructuring, Both Lead to Success
There are two main types of corporate splits, both demonstrating that splitting can increase value:
- Siemens: The company voluntarily downsized its business units, resulting in a three-fold increase in market value. Originally covering multiple sectors including lighting, home appliances, and rail transit, Siemens restructured by separating its lighting (sold to Osram in 2013), healthcare (in 2018), and energy (in 2020) segments. This allowed each division to focus on its core strengths, leading to increased profitability.
- GE: Forced to split during the financial crisis, GE transformed from a dominant conglomerate (with a peak market value of 600 billion) into three independent companies: Healthcare (now valued over 20 billion), Energy (transitioning to renewable energy with profit margins rising from 2% to 11%), and Aviation (leading in aircraft engines). Each division has recovered its value since the split.
3. The Chinese Company's Addiction to Conglomerates: Being Large Doesn't Equal Being Strong
Domestic companies are often obsessed with forming conglomerates, but this approach comes with several challenges:
- Scale Worship: Is a revenue of 100 billion yuan considered a sign of strength? Many local governments favor large firms, leading to unnecessary diversifications (e.g., into renewable energy and AI) without focusing on core competencies. For example, Samsung's diversified portfolio includes storage, manufacturing, and consumer electronics, while its specialized memory business outperformed Samsung in the AI market.
- False Synergy: Sharing a brand doesn't necessarily lead to improved efficiency. Many conglomerates merely pool resources or share costs without truly reducing expenses or increasing profits. Xiaomi's "smart home" ecosystem (mobile phones, cars, and home appliances) is poorly integrated, affecting its financial performance.
- State-Owned Enterprises Still Overreaching: Many state-owned energy and heavy-industry firms continue to expand their entire value chains. However, the divestiture of non-core assets (such as real estate by China Metallurgical Corporation) highlighted the importance of focusing on core competencies.
4. Diversification Is Not a Problem in itself; It Depends on Effective Synergy
Diversification is not inherently bad, but it must meet three conditions: shared foundational technologies, customer channels, and supply chains (i.e., "concentrated diversification"):
- Positive Examples: Huawei and BYD demonstrate effective synergy through their integrated approach across various businesses (ICT, consumer electronics, digital energy, and electric vehicles).
- Negative Examples: Blind diversifications into unrelated areas (e.g., renewable energy or AI) can dilute core competencies and harm main business operations.
5. Organizational Management Is Crucial
Domestic companies often wait until their organizations become bloated before implementing reforms. For example, Midea reduced its number of business units from 25 to a more efficient two-tier structure, improving profitability. To avoid similar issues, companies should plan for potential splits early and ensure that diversification does not undermine efficiency.
Conclusion
No business model remains effective forever, and conglomerates are just a temporary strategy. While they can help in resource consolidation and technological advancement, the ultimate goal is to become stronger. When internal conflicts outweigh collaboration and business segments diverge, splitting into specialized entities is the better option. The current trend of corporate splits worldwide serves as a clear reminder of this principle.