wechat_bg

2017-12-28 03:46:18 Commentary

In early December, Lao Zhang and Xiao Zhang — pseudonyms of an entrepreneurial father and his son — braved the biting cold of Hangzhou, in eastern China, to take part in a training course I was running at Zhejiang University. For both men, who are the founder and heir of a large company that manufactures heating equipment, the talk was on a subject close to their hearts: the succession and management of family enterprises.

Lao Zhang is relatively well-known in his hometown of Xi’an, in northwestern China’s Shaanxi province. Now in his 50s, he started his business in the early 1990s, which is worth several hundred million yuan today.

The two Zhangs offer a glimpse into the kind of people who head China’s family enterprises. Although the true number of such enterprises is unknown, a 2011 report estimated that around 80 percent of China’s private companies were family-run. If we define family enterprises as any enterprise where the founder or their family holds more than 50 percent of the shares, then they probably number in the millions.

Clearly, family enterprises play a vital role in China’s economy. In terms of scale, they range in size from conglomerates such as Wahaha, the largest food and beverage producer in China, to any one of the country’s ubiquitous mom-and-pop shops run by husbands and wives.

Today’s Chinese family enterprises have a much shorter history than those found in developed economies. The establishment of the centrally planned economy after 1949 put an abrupt halt to the development of private enterprise in China, and it was not until the early 1980s that the government allowed private enterprise to flourish again.

In the early days of the reform and opening-up era, a shortage of freely flowing skilled labor meant that most entrepreneurs chose to involve their family in their businesses. Today, the vast majority of Chinese family enterprises are still run by the generation that founded them, with their children gradually becoming more involved in their operations. This is notably different from the situation in developed countries, which have seen family businesses passed down from generation to generation over hundreds of years.

Chinese family enterprises are also in the process of reforming their business ethics, company culture, and management models. At present, Chinese family enterprises lack extensive knowledge of modern operational structures such as family trusts, family committees, and family constitutions, all of which are designed to preserve wealth for the people who started the business. Firms have also lost touch with traditional Chinese culture, especially Confucian ethical rules that stress family harmony as a crucial component of commercial success.

Aside from the considerable contributions family enterprises have made to China’s GDP and job market, the enviable fortunes they have accumulated have given birth to a more individualistic generation, some of whom love to flaunt their wealth. Their excessive behavior, magnified by media reports, has earned them a negative public reputation.

In reality, however, the vast majority of the second generation do not resemble the ones regularly featured in media reports. In fact, they carry a heavy burden: While their parents may dream of passing on their businesses to them, youngsters are not necessarily interested in running them or capable of doing so. But they feel it is their responsibility to inherit their parents’ companies nonetheless.

In my experience of speaking to entrepreneurial families, many members of the second generation were either born or reached adolescence when their parents started their companies. This meant that at the time when children needed their parents the most, the latter were preoccupied with getting their businesses off the ground and couldn’t afford to spend time with the kids.

In order to compensate for their absence, parents not only tried to meet their children’s every material need, but also spent vast sums on their children’s education, sending them to the best overseas schools and universities. Yet this emphasis on their children’s futures only further estranged the two generations. It also led the younger generation to have almost no understanding of, or attachment to, the family business.

It is not uncommon for the first generation to attach strong emotions to the success of their businesses. But their children tend to view them as just another piece of property, with a market value like any other. In such instances, it’s easy for conflicts to brew between the two generations. Only around 15 percent of family enterprises have founders willing to hand over the business and the younger generation who are willing to inherit.

The problem is compounded by the fact that many low-end manufacturing businesses, established early in the reform and opening-up era, are no longer viable cash cows. Instead, the younger generation tends to view them as sunset industries and look instead toward the internet, financial, fashion, and creative industries. Rather than rejecting their families’ money, they use it as a kind of angel investment when they start their own businesses in more trendy sectors. This is the case with the Zhangs: Lao Zhang made his fortune selling heaters, while his son hopes to reinvest the company’s profits in the internet gaming industry.

There are still many in the younger generation who are willing to take charge of their parents’ companies. Yet in such cases, acceptance generally comes with a stipulation that their parents will endorse and support such changes to the business that their children deem necessary. In practice, as the first generation grows older, the power dynamic between them and their heirs will gradually start to tilt in favor of the latter.

Translator: Kilian O’Donnell; editors: Zhang Bo and Matthew Walsh.

(Header image: Sino View-RM/VCG)