Five years ago, Chinese entrepreneurs might have feared and shunned the topic of “family businesses.” Nowadays, second-generation leaders have started to openly talk about business succession.
Teng Bingsheng, Associate Dean and Associate Professor of Strategy at Cheung Kong Graduate School of Business (CKGSB), has observed such changes from teaching second-generation entrepreneurs over the years.
Professor Teng will share his wisdom in this summer’s iLEAD program, a collaboration between CKGSB, Cornell University, Next Opportunity Group and US-China Partners. iLEAD is a unique global leadership development and networking program for executives from American, Chinese and other international family enterprises. Participants will spend three weeks in Philadelphia, New York, Beijing and Shanghai in an accelerated environment designed to ready them as emerging leaders through skill-building, practical application and networking with peers.
In Beijing, Professor Teng will discuss strategies for entering the Chinese market as well as provide a firm introduction to the major Chinese family businesses.
In the first installment of Ping An: Chinese Family Business Dreams Interview Series, we sat down with Professor Teng recently to discuss the topic of family business succession. Why such changes? What do they suggest? Read on to discover his answers.
Entrepreneurs Beginning to Accept “Family Business”
Q: I believe you’re aware of Chinese President Xi Jinping’s speech at the 2015 Spring Festival Get-Together, which stressed family bonds and family education. According to your research and observation of family businesses in recent years, what new trends do you think Chinese family businesses have developed?
A: CKGSB offered a family business program in 2008, but the program was suspended after only one session. Many entrepreneurs were rather sensitive then, including some of our participants. Some participants said at the time, “We only have two or three family members in our company. Why are we called a family business?” But now you would find people are no longer on the defensive when they are called a “family business.” CKGSB resumed its family business program last year and it was a huge success. In fact, in Chinese history “a prominent name” was an honorable title and was reflected in “families,” as President Xi referred to “family bonds.” Entrepreneurs now have realized that there is nothing to be ashamed about in having a family business, and passing the business down through generations should be something they feel proud of. More and more entrepreneurs have realized they can keep their companies within the family.
Q: What do you think about the current situation of family business succession in China?
A: Empirical studies abroad found that only 30% of family businesses pass successfully from the first generation to the second generation. Now it seems that Chinese family business succession has a higher success rate, but that’s probably because we haven’t reached a breaking point. We haven’t seen many cases like Haixin’s collapse. It’s also probably because the real succession has been put off. Chinese family businesses have extended their succession process. Although there hasn’t been any obvious failure, the future is still unpredictable.
Don’t Take a Gambler’s Approach to Family Succession
Q: We found Chinese family businesses have actually achieved what their peers in other countries have done in five or six generations. Is this a concern to you?
A: The development path of Chinese companies is such that they have taken just 30 years to accomplish what their global peers have achieved in 300 years. The development of family businesses is a microcosm of the Chinese business world: long repressed, they are able to release tremendous energy and there is a sense of urgency to seize the day. Few companies have left room for further development to allow the third or fourth generations to grow the business step by step. Instead, the founders have usually done everything they could see or think of. China’s richest men “can only keep their top position for three to five years.” All race forward to chase one another.
I would worry about them. They keep building up one floor on top of another, but without solidifying the previous floor. Some entrepreneurs seem to walk a tightrope. They would rather bet big, assuming the worst scenario is to lose everything they’ve earned and start over. This is a typical gambler’s approach. And Chinese have a higher tolerance for gambling than other cultures do.
Chinese companies value speed the most. Because the environment changes a lot and many gaps exist, you have to try as you go. If you wait, you will certainly lose opportunities. You have to go and grab them, and there might be a chance to succeed. This approach used to be effective, but after companies accumulate a certain amount of resources, continuing their growth will be a big challenge for the managers of family businesses. Some lack talent within the family. The second generation can’t carry the torch, but there are no other choices but to pass the companies to them.
Q: Then how do you get the balance right?
A: Family businesses are like the eight trigrams*, half of which represent heritage and the other half change. They need to try as much as possible to reach the balance between heritage and change. Compared with public companies, family businesses usually inherit more, including feelings and family culture.
Keep an Open Mind When Planning Family Succession
Q: What attitude do you think the current generation of entrepreneurs should keep toward family succession?
A: Family succession should be innovative and tolerant. One of the students I interviewed today is the son-in-law of the company’s founder. He has already taken many responsibilities in the family business. He said, “My father-in-law likes me even more than my wife.” His wife worked up from the bottom, but he was promoted to senior executive after working a couple of years at other companies. This is probably borrowed from the Japanese open perspective: sons-in-law are often the most effective talents a company can recruit from the market.
Many second-generation owners are not eager to join their family’s business, especially in traditional manufacturing industries. They prefer to pursue Internet, finance or investment careers. I think we should let the second generation to do what they like, and leave traditional industries to be run by professional managers, thus keeping the stock sector growing steadily and letting the incremental sector be explored by the second generation. This is a good combination, and it won’t shake the foundation of the family’s economy. When second-generation entrepreneurs find investments are not as promising as they imagined and do not make money, they may change their minds and come back to the more secure industries. After being rebuffed in the outside world, they are willing to come back to their family business. This is a good process and experience.
Q: How do you think first generation entrepreneurs should better pass down their companies to the second generation? How should they transfer stock ownership in the succession?
A: Second-generation entrepreneurs are unlikely to have the same comprehensive capabilities and entrepreneurial spirit as the first generation. They are mostly educated abroad and have never experienced hardship. If they knew the future of their family business relied on them, they would probably have learned and been involved in the business from an early age. When passing down their companies, the first generation should let go, allowing the second generation to explore a new world. I’ve seen a founder lead his veterans away to start a new company and leave his heritage to his son, who brought in his own team.
It’s like Emperor Zhu Yuanzhang’s succession story in history. After the emperor’s eldest son died, he killed all of his own cabinet members to remove potential threats before passing the throne to his grandson, but the old emperor never expected one of his sons, Zhu Di, to start a war of rebellion. Like Haixin Iron & Steel Group’s succession story, the founder picked his grandson to take over the company, because he believed the entire enterprise should remain family property. In the Qing Dynasty, the Manchu emperors abolished the Han tradition and established succession rules that all sons of the emperor could have the right to inherit the throne. But the downside was that it could intensify internal rivalries. So succession should have stability. Some entrepreneurs only have one son, but they don’t rush to pass stock ownership to their son. For example, Fotile’s founder Mao Lixiang extended the succession process by “taking three years to assist, three years to watch and three more years to guide” the successor. This is a more reasonable compromise.
The Second Generation Should Avoid Overseas M&A Illusions
Q: The research team of Ping An: Chinese Family Business Succession Award found in their research that many second-generation entrepreneurs choose to go global after they take over the business. One of their moves is to pursue overseas mergers and acquisitions. How do you think their ideas of M&As are different from those of the first generation? What problems should they pay attention to?
A: Second-generation entrepreneurs choose to go global and pursue overseas M&As not because their M&A ideas are essentially different, but because the environment and resources have changed. The first generation didn’t have that many resources to pursue overseas M&As. Their original capacity could not support global expansion. In fact, family businesses don’t necessarily have to wait until the second generation to pursue overseas M&As. For example, Wan Long, Chairman of Shuanghui Group, in his 70s decided to take over an American pork producer. No matter what stage you are at, what you should consider is whether you could take over and manage it well.
Second-generation entrepreneurs may be more confident in pursuing overseas M&As. Having had overseas educational experiences, they believe they can manage it well after the acquisition. If you have never worked overseas and have never held a senior management position at a large multinational company, when you take over an overseas company without the help of executives with domestic and international senior management experience, it could be difficult to succeed.
Q: Do you think now is the best time for Chinese family businesses to pursue overseas M&As? What is a better M&A approach?
A: M&A currently is a very good strategy. Now China has abundant capital. The yuan is likely to depreciate in the future. So now is a good time, but the key is to find the best companies to buy. Some Chinese companies are very interested in buying German companies, especially family businesses, because they are small, successful, and often less-known leaders in niche markets. But they usually have a strong family honor and it’s emotionally hard for them to sell their companies, so they rarely do. Even if some do decide to sell, they want a decent deal process. If they think you are a barbarian, they may feel that they would lose face in a deal with you. Some of our alumni are establishing a fund to promote overseas M&A. They will hire European professionals as CEOs. If a family decides to sell its business, the fund will take over for a period of time and then try to sell to a Chinese buyer, providing an effective matching service.
* The eight trigrams are important symbols of Eastern philosophy. Derived from Yin and Yang, they depict the eight types of consciousness and represent naturally occurring processes, movement and change. Each of the trigrams has a structure, and image, a motivation, and an essence.