Do you follow finance?
Are you paying attention to what is happening to Evergrande?
Evergrande is a massive Chinese company that got its start in real estate.
Evergrande is failing.
Evergrande is the Enron of China.
One only has to read this article in Wikipedia to understand why Evergrande is failing.
It’s not rocket science.
Evergrande is failing because it got into everything, just like Enron got into everything.
Evergrande, like Enron, got into businesses in which it knew nothing.
It’s not difficult to do.
The temptation to expand must be too much for companies who are making a lot of money, because so many companies do it.
The company becomes successful, and the success goes to the head of the people who are running the company.
They are sitting on a mountain of money. Hey
They certainly have no intention of returning that money to the shareholders.
Instead they begin to think that they are masters of the universe who can do everything.
And so they do.
Just look at the diverse products and lines of work that Evergrande invested it.
Sports teams, electric cars, theme parks, hospitals, retirement homes.
They even got into pig farming,
If that isn’t the height of arrogance for a company that got its start in real estate, I don’t know what is.
The wages of arrogance are bankruptcy.
This is the situation that Evergrande finds itself in.
And it won’t be able to right itself.
There is a reason for this debacle, and it’s called decay.
Yes, it’s possible for a company like Evergrande to buy winning companies and make a lot of money.
But in time, those companies are going to decay.
Decay is the natural order of the universe.
Things break down. People move on.
Inevitably decay will occur to a winning company.
To correct this, the parent company needs to be able to select the right people and machinery that need to be replaced.
Or they will need to beef up the technology to keep up-to-date with a changing world.
The problem is that the parent company, in this case Evergrande, doesn’t have the culture and experience to make the right decisions.
They will then make decisions based upon the culture of the parent company which, in the case of Evergrande, is finance.
In the case of pig farming, what does Evergrande know about pig farming? How can Evergrande possibly make good decisions about who will next run the company?
Evergrande’s corporate culture as it accumulated more companies became more financial in nature.
Its focus and expertise became focused on money making and profits rather than the nuts and bolts of a particular business.
Since it doesn’t know anything about pig farming, it will replace the CEO of the pig farm not with a pig farmer but a banker who has no experience in pig farming – but plenty of experience in money manipulation.
In time, the quality of the pig farming operation will go down even though profits may rise through financial chicanery.
A point will be reached when the chickens will come home to roost.
That is the point that Evergrande now finds itself.
The chickens have come home to roost.
Many people will lose their life savings in this impending bankruptcy unless, of course, China bails them out.
The take-home lesson here is to beware of companies that drift too far away from their principal occupation.
It’s not possible to be good at everything.
Being good at one thing involves a set of specialized skills that intrinsically makes you weak in other areas of endeavor.
The company that reaches too far into too many widely dispersed areas of endeavor often falls.
Pride precedeth the fall.
Copyright 2021 Archer Crosley All Rights Reserved