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Abu Dhabi, UAEMonday 19 November 2018

Uneasy transitions in Chinese family businesses

Seamless successions are proving to be a major stumbling block among Chinese enterprises as rich owners are cagey about handing over the reins to a younger, more feckless generation.
China's Wanda Group chairman Wang Jianlin speaks during an agreement ceremony in Beijing. Wu Hong / EPA
China's Wanda Group chairman Wang Jianlin speaks during an agreement ceremony in Beijing. Wu Hong / EPA

China’s legions of small and medium-sized family businesses are grappling with a problem that is essentially a new one – how to hand over the reins of a successful business to the next generation.

Private businesses did not exist in China during the planned economy era that ran from the foundation of the People’s Republic of China in 1949 until the late 1970s, when Deng Xiaoping issued the rallying cry “To get rich is glorious” and private enterprises started to pop up around the country.

China’s economic reform period is less than four decades old, and the vast majority of the country’s private companies are family owned.

The state sector now accounts for between one third and one quarter of GDP, and this figure is set to fall further as the government continues its plan to cut back on state-owned enterprises (SOEs).

In manufacturing the figure is even lower, with SOEs accounting for 20 per cent of output.

But succession is proving to be a major impediment among Chinese firms, because the owners are reluctant to hand on to people outside the family. Most of the rich private entrepreneurs in China are pioneers of their family businesses – their wealth has been in the hands of two generations at the most.

As these entrepreneurs prepare to pass their wealth to their offspring, questions often surface about what form the family business will continue in and the risks that it will face after the reins change hands.

According to research published in the Global Times newspaper, about 90 per cent of China’s private enterprises are family businesses, but in the vast majority of these, around 82 per cent, the children of the entrepreneurs are unwilling to take over from their parents – and less than one third of family firms have been successful after the handover.

For the children of the new rich in China, it is hard for them to shake off the perception that they were born with silver chopsticks in their hands and lack the entpreneurial instinct of their parents.

The behaviour of some children of the new rich regularly causes scandals in the media, as they zip up and down the country’s motorways in their Maseratis and Ferraris.

Relay China is an NGO for the sons and daughters of the nouveau riche, and its members have looked overseas for inspiration to see what foreign family firms do when it comes to handing over to the younger generation.

The group’s founder, Chen Hao, is keen to shake off the image of the current generation of young people being spoiled and feckless.

“The young generation of Chinese entrepreneurs has an extensive international education and broad horizons and easily adapts to new ideas,” Mr Chen told the China Daily newspaper. Learning management experience from one’s foreign counterparts is highly useful, Mr Chen noted.

One example often cited as an example of a successful transition came in 2012, when He Xiangjian, the founder of the home appliance giant Midea, passed the reins to Fang Hongbo, the chairman and president of the enterprise’s listed arm, rather than to his son, He Jianfeng, who had a non-executive position on the board. Since the handover to Mr Fang, who is often quoted using his Anglicised name Paul Fang, Midea has expanded strongly, including major growth in its e-commerce business.

Probably the highest profile succession story in Chinese business at the moment is who will take over the vast Dalian Wanda conglomerate when the founding chairman Wang Jianlin retires at 68, as he has said he plans to do.

His only son, Wang Sicong, 26, is on the board of Wanda Group, holding 2 per cent of the company, is the chairman of the private equity firm Prometheus Capital, and runs his own electronic gaming firm, called Invictus.

The younger Wang is said to be worth about US$14 billion, but he is generally viewed as a bit of a playboy, and caused a stir on the internet when he said that what he was looking for in a girlfriend was mostly a large bosom.

He also has a tendency to make untoward comments on Sina Weibo, where he has 11.6 million followers.

His father has not said whether he will succeed him when he steps down, although he has said he plans to give most of his empire away and focus on trying to fulfil China’s football aspirations.

Wang senior told WantChina Times regarding his son’s prospects: “If he can make himself accepted by everyone in the next five to eight years, he will succeed me, if he doesn’t have that ability, he won’t,”

Wang senior’s 68th birthday falls on October 24, 2022.

Professor Joseph PH Fan, a director of the Institute of Economics and Finance at the Chinese University of Hong Kong, said succession is a “great challenge” and Chinese, and indeed many Asian, families don’t do well with it.

Mr Fan said Chinese family companies’ governance is often weak and their biggest enemy is themselves.

He advises families to adopt an integrated road map to plan their family and business succession. That requires family governance that shares family values and consolidates family interests, ownership structures that are simple and effective and balance the rewards among family members.

He said corporate governance needs to induce incentives and encourage the collaboration of family and non-family managers.

“Families need to find their own cultural values,” he said.

Writing in Forbes, Oliver Rui, a professor of finance and accounting at the China Europe International Business School, said the next five to 10 years will be critical because that will be when the first wave of post-reform entrepreneurs begin to retire.

“Family firms face an inherent paradox,” wrote Mr Rui.

“In order to maintain their competitive advantage they eventually need to look outside the family and tap into the larger pool of professional managerial talent. However bringing in professional managers may dilute family control of the company.”

But less than a third of family businesses are successfully passed on to the second generation, and less than 14 per cent are handed on to the third generation successfully, he wrote.

He says that entrepreneurs in China should carefully consider whether it’s worth keeping things in the family, or passing it on.

“They should also remember that passing the baton to the next generation is not science; it’s an art,” he said.

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