Karma Finally Catches Up with China’s Bloated and Self-Righteous HNA

Whatever HNA Group Co. lacked, it wasn’t ambition. Some companies aspire to move fast and break things, some to make the best products on Earth; others are content just trying not to be evil. Such mundane goals were never enough for China’s only Buddhist travel conglomerate, which aimed to raise the whole of humankind to a higher plane of prosperity and create world peace.

“As it has developed, HNA has constantly explored how to build a new kind of civilization for mankind,” then-Chairman and co-founder Chen Feng was cited as saying in a 2015 Harvard Business School study. Before he died in an accident while sightseeing in France in 2018, fellow co-founder Wang Jian said he hoped HNA would become a “great enterprise” as, “only then, will [we] be able to develop HNA into a hundred-year company or a thousand-year company.”

HNA didn’t live to be 1,000. Founded in the early 1990s on China’s southern tropical island of Hainan, it found itself in bankruptcy proceedings before the age of 30. There was an air of inevitability about the announcements last weekend by three publicly traded HNA companies that shareholders and affiliates had misappropriated the equivalent of about $10 billion of funds. This is the way it tends to go in China. First comes the explosive growth and the soaring rhetoric. Then, the warnings about excessive debt. Next in this well-worn narrative come asset sales and a government takeover. Finally, the evidence of wrongdoing emerges, and the hunt for scapegoats begins.

Themes old and new resonate in the downfall of HNA. The dangers of hype, hubris and reckless overreach are as ancient as the idea of the joint-stock company itself. Other lessons are more modern, and particular to the environment in which HNA operated.

HNA espoused a corporate culture that combined Chinese traditional values and Buddhist ideals, distributing a list of 10 “commandments” to new employees that included benevolence and humility. An introduction posted on HNA’s website is anything but modest, though, paying tribute to the “miracle” of the group’s two-decade rise from Hainan-based aviation enterprise to global conglomerate.

For HNA, culture was the secret sauce that enabled it to avoid trouble. The group “kept emphasizing culture,” Chen said in the Harvard study. “Every time a global crisis hit in China, we saw it coming and were able to prepare in advance.”

There’s nothing wrong with HNA’s profession of love, devotion and altruism in business. These values are fine, noble even — if perhaps more suited to the priesthood than to corporate strategy documents. They just tell you next to nothing about the real drivers of HNA’s spectacular growth and chances of survival, which had little to do with compassionate hearts and everything to do with political connections.

The real secret sauce behind HNA’s rise was access to cheap money. The complicated business of assessing hurdle rates, internal rates of return and net present values is made a whole lot simpler when capital is almost free. Then, everything is a buy.

This was documented by my Bloomberg Opinion colleague David Fickling in 2016. Parsing a bond prospectus to analyze HNA’s purchase of an aircraft lessor, he calculated that the group was borrowing more cheaply than the U.S. government. It’s a safe bet that most of this came from Chinese state-controlled banks.

Too much free money can be a curse, as Fickling warned prophetically. It breeds complacency. HNA set out a plan for growth: an eightfold expansion in the five years through 2020, another quadrupling in the period through 2025, with more growth envisaged in the decade to follow.

In the beginning, the acquisition binge at least had a veneer of commercial logic, as HNA confined itself to companies related to the travel industry: baggage handlers, airline caterers, hotels. This was soon jettisoned, and the list of targets expanded to include trophy real estate in New York and London, a stake in Deutsche Bank AG, and technology distributor Ingram Micro Inc., in an empire that reached almost $190 billion in assets at its height.

HNA was hardly blind to the dangers of such rapid expansion. In the Harvard study, titled “HNA Group: Global Excellence with Chinese Characteristics,” Chen set out one of the less robust risk-management systems in the annals of corporate history: “Where on this Earth is there not risk? There is risk everywhere. It just depends on your destiny. If your luck is good, then you will overcome the risks.”

Executives clearly felt they were smart enough to dodge the bullets. “Smart” is a word that recurs in the vocabulary of HNA’s leaders, as my Bloomberg Opinion colleague Anjani Trivedi has noted. “We try to be a smart investor,” Guang Yang, chief investment officer of HNA Capital, the group’s finance arm, told the Wall Street Journal in 2017.  “We’re not different from, let’s say, some of the best private-equity funds.”

There are echoes here of Enron’s “smartest guys in the room.” The notorious U.S. energy trader also outlined a grand vision that was at odds with the more prosaic and perhaps sordid reality of how it made money (or pretended to). In Enron’s case, it evangelized for the cause of free markets. Behind the scenes, it lobbied politicians to deregulate energy markets that it could then manipulate.

To be sure, there has been no suggestion of accounting fraud at HNA on a scale to compare with Enron. Still, the two companies in some ways are mirror images, both reflecting the zeitgeist of their time and place. While Enron championed the U.S. creed of deregulation, HNA couched its corporate mission in pseudo-communist rhetoric. “By incorporating traditional Chinese culture and integrating Chinese socialist values with a world-class management system, HNA fosters a corporate culture befitting both Chinese and western society,” the company says on its website. Its “10 commandments,” “three mores, two lesses, and two hearts,” and “four commons” are forms reminiscent of Communist Party mass campaigns. In both cases, byzantine complexity and lack of transparency obfuscated less salubrious realities.

Predictably, conditions changed for HNA. China’s central authorities became increasingly alarmed by the overseas adventures of debt-addicted conglomerates, and started to pare back leverage. Capital became more expensive. The pandemic was the coup de grace. Any aviation-based business would have struggled to survive such a blow without support. For HNA, that support wasn’t forthcoming, raising the question of what changed.

Here, we bump up against the enduring conundrum for HNA, as for any enterprise of significant size in China: Who owns it? Not, necessarily, whose name is on the corporate register, but who really owns it, what are their political connections, and how strongly do these stand in the power structure? These questions, so salient to a company’s value and future prospects, often go unanswered, and perhaps are unanswerable. They have hung over HNA’s global ambitions.

Unlike Enron, HNA is unlikely to disappear. It will be reincarnated in some form, though as a radically different beast — pared down, refocused on its core business of airlines and related services, and shorn of its ragbag of disparate acquisitions. That’s one advantage of being Buddhist: At least you get to try again.

The figures in the bond prospectus, affirmed by an HNA spokesman, showed the company paid the equivalent of 0.1% cash interest on its average borrowings in 2015. Corporate data compiled by Bloomberg show HNA paid 12.4 billion yuan ($1.9 billion) in interest on 308.7 billion yuan of total debt in 2015, equivalent to a rate of 4%.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew Brooker is an editor with Bloomberg Opinion. He previously was a columnist, editor and bureau chief for Bloomberg News. Before joining Bloomberg, he worked for the South China Morning Post. He is a CFA charterholder.

©2021 Bloomberg L.P.

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