Private Enterprise Could Save China
from Crippling Joblessness
February 4, 2000
In China, twenty years after Deng Xiaoping's reforms began, private enterprises are often still treated like unwanted children. Reality and necessity are changing this. In the first weeks of the year, Prime Minister Zhu Rongji and other leaders emphasized the importance of private business to the nation's economic health. Membership in the World Trade Organization will expose thousands of inefficient, loss-making state-owned enterprises in China to global competition - and unemployment may well skyrocket.
Private enterprise is the likeliest savior. Asiaweek correspondent Rose Tang offers a snapshot in words and pictures of four companies - one is a joint venture with a Singapore bank - that shows how resourceful Chinese entrepreneurs can overcome the obstacles.
Patriotic Critic Tongchan International Investment founder and president Chen Jinfei
Chen Jinfei's office in a downtown Beijing skyscraper looks more like a shrine to Mao Zedong than the headquarters of one of China's oldest and most successful modern-era entrepreneurs. Mao's portrait hangs on the wall along with quotations in oversized characters. Chen says Mao left a big impression on him when he was a 12-year-old Red Guard. "Whenever I'm in trouble, I stand in front of this wall and recite Mao's quotations."
That much is for himself. For foreign visitors he has installed a Chinese flag that emerges mechanically with the touch of a button at his desk. The flag rolls out to cover an entire wall. He installed the device so he could demonstrate his patriotism. But he feels conflict. "We minying [private] entrepreneurs don't belong to any class. The whole society sneers at us. We are treated like the children of a concubine."
Since Chen quit his job as a researcher at the Ministry of Post and Telecommunications in 1987 and became a private businessman, his company has grown from a hut next to a pigsty to become China's tenth-largest private company with assets of $423 million, 25 subsidiaries, and interests in property, building materials, telecommunications and finance. His motivation is decidedly un-Maoist: "I just want to make money."
After amassing a small stake from printing T-shirts, he headed for Hainan island, which in the late 1980s was a magnet for fledgling entrepreneurs. He started trading canned goods and beverages, but a fortuitous land sale to an American business made him realize that real estate was the way to go. "The money rolled in." He was later either shrewd or lucky enough to see that Hainan property was becoming overheated and got out before it crashed.
Returning to Beijing, Chen looked around for new opportunities. He found an opening in an official restriction against private firms developing property by themselves - in China, rules really do seem made to be broken. Chen sought out district governments anxious to build and willing to trade land in return for a stake in developments. Since then it has often been a winning combination. Tongchan has erected a million square meters of commercial and residential property in Beijing this way. But such partnerships also have risks. Sometimes local districts renege, and there isn't much a private company can do except walk away and try again.
Chen's latest vision is technology and finance. "Property has too many limitations," he says. Tongchan established a bank on Wall Street in 1999, is looking for securities firms to partner with and has acquired 60% of a telecommunications unit of the Information Industry Ministry linked to mobile phones and computers. What would Mao say? Rooted But Flexible China Liaoning Panpan Group founder Han Zhaoshan
Next to a dusty road southwest of the Liaoning provincial capital, Shenyang, stands a giant, graying statue of Panpan, the cheerful panda mascot of the 1990 Asian Games. If it seems slightly out of place, emerging from a rice padi in the Chinese countryside, that is nothing compared with the company it represents. Not far away sits a modern office block and a collection of tin sheds which represent a not-so-typical private enterprise success story in China. Panpan is Asia's largest manufacturer of security doors, and it accounts for more than 80% of the revenues for the town in which it sits, Shuiyuan. Panpan today is a vigorous, nimble company with annual sales of $145 million.
In 1982, Panpan's founder Han Zhaoshan was running an average township enterprise, the Shuiyuan Agriculture Machinery Factory. Private enterprise barely existed in China at the time, but Han persuaded local authorities to let him take over a small workshop from the factory in exchange for the promise to pay about $11,000 in three years. The state-owned enterprise was piling up debt and agreed to chance the deal, which was like an industrial version of the rural "responsibility system" just beginning to take off among farmers. Han's new plant was so cash-strapped it couldn't afford oxygen for welding. He borrowed money from a friend and landed some contracts from the Shenyang army to supply first-aid kits.
Han soon spotted another niche - filing cabinets. He paid workers according to the number of cabinets produced - an early type of pay-for-performance system in post-Mao China that helped eliminate lazy, state-enterprise habits. The factory doubled its profits every year, and the workforce grew to 500. When the filing cabinet market became saturated, Han and company nimbly switched to security doors, anticipating that demand would climb on the back of increasing urban crime and new apartment construction.
Along the way, Han grew to recognize the value of marketing. At first that meant giving the sales staff lessons in ballroom dancing to help them develop an air of sophistication. More recently it has involved straight-forward advertising. Panpan has spent $1.4 million on ads since 1992.
In 1997, Han persuaded his former overlords at Shuiyuan township to sell him Panpan outright for $1 million. Soon the newly independent company acquired another state-owned machinery factory in a neighboring city. The workers struck when they first learned of the sale, but were soon mollified by wages twice as big as what they received before. Panpan is now borrowing to expand and hopes to list in Hong Kong in the next few months. But Han won't move the company; he wouldn't feel comfortable too far from the rice padi.
An Unanticipated Calling Huaxin International vice president Zhao Guangcai
Zhao Guangcai grew up in a typical Chinese one-bedroom apartment with squat toilets and no bath. He and his brothers had to sleep on the floor. "We didn't have the faintest idea about luxury housing," he says - rather an understatement. But that did not stop him and his partners, all with similar backgrounds, from diving into the high-end property market, targeting foreign businessmen and China's nouveau riche.
In Zhao's case, the inspiration came not so much from within as it did from the government itself. In 1990, a few months after the Tiananmen Square crackdown, foreign investors were either pulling out of China if they had operations there or steering clear if they didn't. The Shenyang municipal property management division sent five members of its staff, including Zhao, by train - the city couldn't afford air travel - far and wide looking for projects with which to lure foreign investors.
Emerging from this exploration effort was a joint venture between the city and Singapore's WBL Co., a unit of Oversea-Chinese Banking Corp. In return for $1.2 million up front, WBL got a two-thirds stake in newly christened Shenyang Huaxin International. The remaining ownership was held by the Shenyang government, which also contributed a block of land to build villas. It was the province's first foreign property venture.
Huaxin remains a successful joint venture - a contrast to a more high-profile partnership between Singapore and China in Suzhou near Shanghai. There, a development park has failed miserably. But in Shenyang, Zhao and his crew have learned a whole new way of doing business. "We grew up under the Communist protective umbrella. As former public servants, we had to learn to run an enterprise the hard way," says Zhao. For example, he recalls arriving by bicycle for meetings to persuade foreign executives to buy luxury villas. "We could not afford to buy them dinners, so we just drank tea with them in the lobby."
The company thrived. Zhao says sales took off after former leader Deng Xiaoping's 1992 southern tour, in which he urged the region to embrace capitalism and grow faster. Huaxin stuck with its basic business but expanded all over the country, even as far as Sichuan province in the west. The Huaxin partners have decided to forgo profits during the first 10 years of the enterprise and plow earnings back into the company. Pay is based on performance, and some of the profits are set aside for staff bonuses. Down the road could come a clean break with the government and a public listing in Hong Kong. Here's a Singapore partnership in China that works.
Behind the Scenes China M&A Management founder and president Wang Wei
In China gaining a listing on the stock exchange or becoming a private shareholding company is rarely simple. Government permission is required, and officials can be fickle. So if private companies have such a hard time, especially gaining approval to list outside the mainland, how have Huaxin and Panpan gotten so far? At least partial credit goes to a small Beijing-based consultancy headed by Wang Wei called China M&A Management.
Wang got his start working for two state banks in China. Later, after earning a Ph.D in economics at Fordham University in New York, he returned home anxious for a change. He joined the China Southern Securities in 1992 as one of its youngest-ever executive vice presidents, and he helped 30 state-enterprises gain listings on China's two exchanges - Shenzhen and Shanghai. But he soon became disillusioned. "The state sector is rotten to the core," says Wang.
In the mid-1990s, he joined Beijing's Vantone Industry Corp., one of China's most successful private companies. For a small stake, Vantone, in turn, loaned Wang the money to establish China M&A. His first client was Hainan Huandao Enterprises, nominally owned by the Ministry of Public Security and run by a man identified by Forbes magazine in 1992 as China's richest individual - a former Beijing police chief named Wang Fusheng. But even with connections, Hainan Huandao could not get listed. Then China M&A's Wang went to work. He advised Hainan Huandao to take advantage of its major asset, a hotel, and restructure itself as a tourism company. He encourage the security bureau officials to push for a listing. It worked, and Hainan Huandao raised $28 million in an initial public offering.
China M&A has gone on to other similar successes. The company has had especially good success listing sports and leisure services because, Wang says, party cadres don't take them seriously. He looks beyond the many difficulties of doing business in China, such as getting loans from state banks, to a time when the country will be fully plugged into the global economy through membership in the World Trade Organization. Then his clients will be able to get partners and money anywhere, anytime. At least that's the plan.
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