Beyond Profits: China’s Social Entrepreneurs
A new breed of entrepreneurs takes on China’s most vexing problems
Among the sand dunes of western Inner Mongolia, the futures of the encroaching desert, impoverished farmers and one enterprise are now intertwined with an unlikely product–fruit juice.
Sea buckthorn berries, a fluorescent orange fruit the size of a dime, grow on bushes about three to four feet high in the desert. Liu Zhifeng, founder and CEO of Spring Mountain, China’s leading producer of sea buckthorn berry juice, has known the fruit since his childhood in Ordos, Inner Mongolia.
“I drank [the juice] when I was younger,” says Liu. “But it wasn’t widely available.” In his early 30s, Liu has accomplished much, and he is eager to do more. The head of companies as varied as a weekly magazine and a hotel, Liu regularly takes the 7 a.m. flight from Beijing to Ordos and then the evening flight back. (One of Spring Mountain’s major sales distribution offices is in Beijing.)
His first company was a small, single store selling elevator components. After nearly having to shut down his company, Liu ventured into different sectors and markets until finally getting in on the ground floor on elevator and central heating installation in the early 2000s. Liu began looking for another business to get into. He went into hotels and media. Yet he still wanted something bigger, something that went beyond the traditional models, something that could help society. Eventually, he thought of the juice he drank in his childhood. No company had begun large-scale production of sea buckthorn berry juice.
“I told my board that I wanted to start producing this juice and they were not excited about it,” says Liu. He got his hands on some research–the juice is full of Vitamin C and Omega-3. In other words, it’s an ideal drink for health food enthusiasts, who are growing in number in China. Global market research firm Euromonitor International estimated that in 2009, sales of wellness foods and beverages in China touched $1.5 billion, a 28% increase from five years earlier.
“Eventually I was able to convince them that this drink had huge market potential, and they decided to go along with me,” says Liu. He raised funds and invested his own money, totaling RMB 800 million, and was off to the races–sort of. “The plant takes three years to bear fruit, so we had a long time to wait before we would see any of that investment back.” Liu spent the three years acquiring the best juicing machinery, researching the health benefits of the juice, building sales channels and training farmers to ensue product quality. In 2011, the first year the bushes bore fruit, Liu’s company boasted a sales revenue of RMB 200 million.
Going the Extra Acre
If Spring Mountain were a normal beverage company, that would be the end of the story. But it’s not. It’s on the cutting edge of a business model that’s relatively new to China–the social enterprise. Although he doesn’t use the terminology, Liu thinks of himself as a social entrepreneur. “Through innovations in our product line, management and technology, we can promote societal progress and solve problems facing the country,” he says. Liu is quick to add that this is not a charity: “Implementing a profitable business model is still the most important thing.”
Western China’s deserts are growing at alarming rates. Asia’s largest desert, the Gobi, devours nearly 1,400 square miles of grassland a year. For decades, the Chinese government has led massive efforts to battle desertification, going so far as building a “green wall” of millions of trees to halt the deserts’ advances. NGOs have attempted schemes of all kinds, sometimes even busing volunteers from Beijing to the desert regions to plant trees or cacti. These efforts have had a limited impact; but there are signs that the solution may come from people outside the government or NGOs. People like Liu.
Spring Mountain plants sea buckthorn bushes on 140,000 rented or purchased acres of desert in Inner Mongolia and Ningxia, two regions hit hard by desertification. The bushes require little water through the year and their roots burrow deep beneath the dunes–stopping erosion and slowing the march of the desert.
The land Spring Mountain uses was considered barren; the farmers and nomads who own it relied on their other tracts of arable land for growing crops and grazing. But when Liu showed up, the useless sand dunes suddenly had value.
During the early phases of his company, Liu spent millions of RMB researching proper planting and maintenance methods for the sea buckthorn bushes. He hired agriculture experts and cooperated with multiple universities. When the time came to leave the greenhouse and head for the fields, this investment paid off in spades. The company sends its contracted farmers through a short training program, making them fully qualified to properly plant and grow the bushes. As more farming techniques are developed, the farmers are retrained to be kept up to speed with the latest methods. Spring Mountain buys the harvested berries, ships them to its factory in Ordos to be made into juice, and then distributes them through its widespread sales network that stretches across China.
This model turns the 70% of farmers that lease their property to Spring Mountain into micro-entrepreneurs, who have more technical know-how and are empowered to make full use of their land. (The other 30% of farmers work on land owned by Spring Mountain.) Farmers in this region are among the poorest in China, averaging a cash income of between RMB 2,000 and RMB 7,000 per year. Spring Mountain pays over 100,000 farmers between RMB 700 and RMB 7,000 per year, giving them revenue in addition to their other farmland.
Spring Mountain is just one of a growing number of social enterprises that are sprouting up across China.
Shokay International, a social enterprise that sells thread made from yak fur, was founded in 2006. The company contracts with nomads, mostly Tibetan, who sheer and weave yak wool, which Shokay then buys and sells to clothing manufacturers. “Our first level impact is to generate more income for Tibetan herders by sourcing fiber directly from local communities,” says Shokay co-founder Carol Chyau. “Along the supply chain, we integrate hand spinners and hand knitters to provide more employment opportunities.”
Like Spring Mountain, Shokay is helping rural Chinese supplement their incomes by taking advantage of untapped resources. For most of the Tibetan herders they employ, yak fur didn’t play a role in making money; at most, they would use it for their own clothes. Thanks to Shokay’s training, however, the herders are now highly adept at weaving and making thread, thereby earning extra cash that they wouldn’t get otherwise.
While many social enterprises are focusing on providing income opportunities for rural dwellers, others are taking on environmental issues. Wang Zhaoming’s Mong Grass sells a hybrid of grass breeds in Inner Mongolia. An agriculture expert himself, Wang and his team of researchers has modified and cross-bred the Mongolian grass for years, strengthening its ability to resist drought. Sold at prices considerably lower than the imported varieties that were previously planted, Wang’s grass is currently used across China both to fight desertification and to reduce water usage in public green spaces.
These aren’t isolated cases. According to YouChange China Social Entrepreneur Foundation, China already has hundreds, possibly thousands, of firms that could be classified as social enterprises.
Clearly, the social enterprise is starting to take off, but why?
Filling the Gaps
Experts point to a confluence of factors: everything from the Olympics to charity scandals.
“The credibility of non-profit organizations has been challenged in China in recent years,” says Liao Jianwen, Professor of Managerial Practice, Strategy, Innovation and Entrepreneurship at Cheung Kong Graduate School of Business (CKGSB). “So people are less reluctant to make donations to those organizations.” The credibility crisis, according to Liao, has been fueled by scandals involving major charitable organizations including the China Red Cross. Because of this, he says “in the social and environmental space, there’s room for business models. There is money to be made in solving social problems.”
Even before the credibility crisis, charitable giving wasn’t particularly high in China. When Warren Buffet and Bill Gates visited in 2010 with hopes of encouraging China’s billionaires to donate their wealth to charity, they were rebuffed. Many of China’s richest people even declined to have dinner with the American billionaires, fearing that they might be asked to make a charitable pledge on the spot. Given this climate, it’s not surprising that the 2011 World Giving Index, which extrapolated Gallup polling data to rank countries’ charitable giving, put China in the 140th spot, a far cry from the No. 1 position held by the world’s other superpower, the United States.
Further, the charity model has limits, explains Prof. Liao. “If you’re a charity, you see a problem, raise money, and then try to solve the problem. After the money is gone, you have to go find more donors. Social enterprises are more sustainable.”
But it’s not just traditional charities that are struggling in China; many NGOs still haven’t found their footing. While that might be bad news for charities and NGOs, according to Yvonne Li, founder and CEO of Avantage Ventures, which provides funding for social enterprises, it might be good overall. “NGOs are now looking to change their model,” she says. “Many are seeking to turn into social enterprises to address cash flow and sustainability issues. [This] is the reason why more and more people are getting involved in social enterprises.”
Many of these social enterprises were formed since 2008, widely considered a watershed year for the sector due to the Sichuan earthquake. “The earthquake gave people a foundation from which they were able to start to understand the role enterprises can play in addressing social issues,” says Ling Hui, program director at YouChange. “The Beijing Olympics cultivated a spirit of volunteerism that fed into greater interest in how to do good things for society sustainably.”
The shift in public attitudes toward charities and social responsibility is obviously benefitting these enterprises, but there’s another factor that can’t be overlooked–the people at the grassroots level working for them. Cornell University Professor Stuart Hart has argued since the mid-1990s that social enterprises need to involve locals throughout the business. “‘[N]ative’ capabilities… enable a company to develop fully contextualized solutions to real problems in ways that respect local culture and natural diversity,” he wrote in the Stanford Social Innovation Review in 2005. These comments go a long way to explain why models like Shokay’s and Spring Mountain’s, which use extensively indigenous resources and skills, have been successful.
The late University of Michigan Business Professor C.K. Prahalad went a step further. He wrote in his 2004 bestseller The Fortune at the Bottom of the Pyramid that enterprises work best when the people involved “get recognition, respect, and fair treatment”. “Building self-esteem and entrepreneurial drive [of the low income groups] is probably the most enduring contribution that the private sector can make,” he wrote. By turning the herders of Tibet and the farmers of Inner Mongolia into businesspeople, Shokay and Spring Mountain are doing just that.
Social enterprises in China are making some solid headway, but they still have a long way to go.
“Our biggest challenge is educating consumers,” says Spring Mountain’s Liu. In other countries, social enterprises can capitalize on their societal benefits to promote their products. “That works with some small segments of Chinese society–the well-educated and the wealthy. But for the most part, advertising our social benefits doesn’t help us sell our products to the average Chinese consumer,” he says. Not to be deterred and always business savvy, Liu hired Zhang Hanyu, one of China’s biggest box office draws, to be the company’s brand ambassador, leveraging the actor’s credibility and popularity to boost consumers’ interest in the juice. Pictures of the superstar adorn almost all of Spring Mountain’s promotional materials.
But not all social enterprises can afford to spread the word and YouChange’s Ling sees this as a major problem. “The average Chinese person doesn’t know anything about social enterprises,” she says. “Most people think enterprises are supposed to make a profit, not help society–that’s for charities. It will still take time for this concept to become widespread and well-understood.”
Average Chinese citizens aren’t the only people who are unclear on what a social enterprise is. “It’s hard to give a definition to the term ‘social enterprise’,” says Ling. “That’s one of the several reasons why there isn’t sufficient policy support coming from the government–they don’t know what should qualify as social enterprise.”
Another aspect of the policy support issue is that working for the benefit of society is often seen as the exclusive province of the government. “What would a social entrepreneur be in China?” asks Rick Aubry, professor of Social Entrepreneurship at Stanford Graduate School of Business. “The government sees part of its role to create social benefits through government activities themselves. They have said, ‘We will take care of the people, you succeed as a businessman to take care of the economic wealth of the country.'”
In the absence of government backing, social enterprises have been seeking support from other organizations, even other countries. Shokay, the yak fiber enterprise, got its startup capital by winning Harvard Business School’s prestigious social innovation competition. YouChange Foundation provides training sessions for social entrepreneurs. And a handful of funds like Avantage Ventures is investing exclusively in social enterprises.
Aubry adds that another major obstacle that social enterprises often face is scalability. “The challenge for the social enterprise is that it tends to be very local and micro in scale,” says Aubry, who has run a social enterprise in San Francisco for over two decades. “It is hard to create a national model where millions of people are affected rather than hundreds.”
Liu Zhifeng also had problems with scalability in the early days of Spring Mountain. “We originally had problems with the farmers,” he says. “They were often unwilling to work with us and were reluctant to rent out there land.” By giving training sessions and paying wages in advance, however, Spring Mountain was able to earn their trust, and now the company works with over 100,000 farmers. Further, Liu has been able to bridge growth problems because he’s been there before. Previously, he built a company from scratch into one with national reach. Now he’s even more ambitious.
“We’ve already received the organic certifications from the USFDA, Japan and the EU; and we’ve been negotiating with foreign exporters,” he says. “Our next step is the international market.”
If he succeeds, Spring Mountain won’t be shipping over just products–it’ll be exporting a different way of doing business.
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