China Inc. & Family Businesses Challenging Dynamics & Rewarding Opportunities
What is the largest English-speaking country in the world? The United States? No. It’s actually China. Of the 1.3 billion people in China, approximately 320 million speak English or at least “basic business” English, according to Dr. Nicholas Lardy, of the Peterson Institute for International Economics, who is a leading authority on China’s rapid-growth development.
Family businesses around the world already feel the social and economic impacts of the world’s most populated nation. China presents many challenging family business questions, including: (a) How do the world’s family businesses work most effectively within the Chinese socio-political-economic system so they can benefit from China’s growing demand for goods and services, and also take advantage of their labor markets? and (b) How do Chinese family-owned businesses plan their own succession in light of the one-child family policy? These questions have implications for companies outside of China that access local markets through Chinese partners.
Figuring out the Chinese business puzzle can be stimulating, frustrating, confusing and profitable because China is a nation of societal polarity. The communist government, while still exercising tight control over most aspects of society, has permitted many capitalistic principles to drive the economy.
Things happen with an ease that seems quite strange to outsiders. Recently in the city of Wuxi, about 100 miles west of Shanghai, the regional government decided to construct a highway off-ramp right through the center of several factories, including one where a U.S. family business had set up its assembly facility for the production of automotive inspection machines. There was no local commission meeting. No zoning policy. Just decide and do it. Many infrastructure changes are accomplished at break-neck speed. As the expatriate general manager of this family business stated, “China is accomplishing in 5 years what it took the U.S. to do in 50 years. We simply must remain flexible and move quickly when an unexpected shift takes place.”
China is a key player in the globalization strategy for many family businesses. As more and more families pursue a globalization strategy, they will encounter the challenges and opportunities of this very hungry, rapidly growing nation. The most common initial business relationship with China by outside family businesses is developed through product sourcing. Many companies are importing components or completely finished products from China mainly because of the lower costs. Now, more family businesses are developing a presence in China to serve the explosive Chinese market, which is expected to create a middle class equal to the U.S. population by 2011.
At the recent CIFF Office Furniture Show in Guangzhou, less than 100 miles north of Hong Kong, international visitors were both seeking products to import to other parts of the world and investigating potential Chinese partners with which to penetrate the Chinese market. Mr. Timothy Liang, president of JSJ China, a subsidiary of a third-generation Michigan family business, attended the show. JSJ has been working in China for over 20 years. Mr. Liang’s father started a foundry for JSJ in Tianjin, south of Beijing, in 1987. JSJ now has five successful operating entities and is helping other family businesses enter the Chinese market. With 30 full-time professionals on the ground in China, JSJ is able to effectively guide newcomers to what it terms “the world’s largest factory.” JSJ advises companies through the challenges of producing quality products on time, enforcing intellectual property, maintaining financial transparency and legally establishing a business. Following are a couple of real-life examples.
A second-generation U.S. company providing electrical subassemblies to furniture companies recently established a wholly owned foreign enterprise (WOFE). After much time searching and cultivating relationships, it partnered with a Chinese company owned by a Taiwanese family. In spite of all the historical turmoil between China and Taiwan, there is still a very strong business relationship between the two countries. This fact is generally misunderstood unless you are embedded in the everyday workings of Chinese business. The lesson for families beginning their venture in China is to take their time and do their research carefully. Enlisting the support of advisors who have been in the market can be very useful. Many family businesses are now seeking to add independent directors with experience in China to join their boards.
In another case, a fourth-generation family business in the U.S. acquired a business in France that manufactures products such as sewer covers for various municipal infrastructure applications. Since the French company also owned a company in China, the U.S. family business was thrust into both new European and Chinese ventures. To help educate the family members who worked in the business and to begin to pass on the values and beliefs of the family, five members of the family traveled extensively to China and France. Fortunately, through the acquisition they gained a Chinese-born managing director of the China operation who speaks Mandarin, French and English. His education includes elementary schooling in China, college degrees in economics and finance in France, and an MBA from Columbia University in the U.S. This is the type of global executive that family businesses will require in the next generation of international commerce. As family businesses venture into China, they will need to rethink the skills and experience required to be a successful executive, and may need to expand their talent pool to include globally minded managers in both their home and foreign operations. There are obvious implications for succession planning, as well. If a family member will take over the business someday, ensuring that the next-generation member has exposure to global markets will be critical.
And what about Chinese family businesses? They face some of the most challenging family succession issues. As a result of the government’s attempt to control population growth, China is a country filled with single-child families. As we know from our studies in the U.S. and Europe, it is usually best to have multiple next-generation members to match the most appropriate skill set for potential leadership and ownership. Chinese family businesses do not have this option. Compounding the issue is the cultural norm of dividing the family assets equally among male members. So, if the only child is a daughter, there likely will be challenges transitioning the business to the next generation. Likewise, if the only child is a son, and he is not interested or capable in the business, there is little chance of family succession. So, what will happen to all the thriving high-growth family businesses in China? These issues should be considered when selecting businesses with which to partner in China.
The succession issue pertains to nonfamily, as well as family managers. With spectacular growth rates in double digits, it is increasingly difficult to retain strong players. The conventional media suggest that there is an abundance of Chinese labor, but this is not true when it comes to skilled positions like engineers and plant managers. Finding and then keeping top-level talent is a major concern.
This is just a taste of the many challenges for families doing business with China. However, the opportunities are much greater, as many U.S. family businesses are discovering.
The economic and social forces are in place for China to continue to expand near its current pace for the next 10 years. Just as in most countries around the world, it will be family businesses that create the greatest economic impact, hire the most people and figure out the solutions to these challenges. And that is because family businesses possess what Confucius stated in one of his many profound quotations: The will to win, the desire to succeed, the urge to reach your full potential…these are the keys that will unlock the door to…excellence.
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