Chinese entrepreneurship

Reworking a formula for economic success — China Daily Commentary

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Reworking a formula for economic success

By PETER FUHRMAN (China Daily) Updated: 2016-04-08

Reworking a formula for economic success
An assembly line of a Daimler AG venture in Minhou, Fujian province.

My on-the-ground experience in China stretches back to the beginnings of the reform era in 1981. Yet I cannot recall a time when so much pessimism, especially in English-language media, has surrounded the Chinese economy. Yes, it is a time of large, perhaps unprecedented transition and challenge.

But the negative outlook is overdone, and starts from a false premise. China does not need to search for a new economic model to generate further prosperity. Instead, what is happening now is a return to a simple formula that has previously worked extraordinarily well: applying pressure on China’s State-owned enterprises to improve their efficiency and profitability, while also doing more to tap China’s most abundant and valuable “natural resource”-the entrepreneurial spirit of the Chinese people, the talent to start a company, provide new jobs and build a successful new business.

These two together provided the impetus for the economic growth since the 1990s. In the 1990s, SOEs accounted for perhaps as much as 90 percent of China’s total economic output. Today, the SOEs’ share has fallen to below 40 percent by most counts. Once the main engine of growth, SOEs are now more like an anchor. Profits across the SOEs have been sinking, while their debt has risen sharply.

Arresting that slide of SOEs is now vital. SOE reform has long been on the agenda of the Chinese government. But such a reform has become more urgent than ever, as well as more difficult. There are fewer SOEs today than in 1991 when serious SOE reform was first undertaken. Among those that remain, many are now extremely big and rank among the biggest companies in the world. The restructuring of any such large company is always difficult.

China, however, has taken some key first steps in that direction. The Chinese government has divided SOEs into those that will operate entirely based on market principles and those that perform a social function. It is downsizing the coal and steel industries, two of the largest red-ink sectors. Senior managers of some large SOEs have been dismissed or are under investigation for corruption, and experiments linking SOEs’ salaries more directly with profitability are underway.

Less noticed, but in my opinion, as important is a strong push now at some SOEs and SOE-affiliated companies to become not better but among the best in the world at what they do. Tsinghua Unigroup in semiconductors, China National Nuclear Corporation and China General Nuclear Power in building and operating nuclear power plants, and CITIC Group in eldercare are seeking global glory. They are trying to sprint while most other SOEs are limping.

Luckily for China, the overall situation in the entrepreneurial sector is far rosier. All it needs is a more level playing field. Important steps to further free up the private sector are now underway-taxes are being cut, banks pushed to lend more, and markets long closed to protect SOE monopolies are being pried open. Healthcare is a good example in this regard.

All these moves are part of what the government calls its new “supply side” policy. The aim is to demolish barriers to competition and efficiency. Chinese entrepreneurs have shown time and again they have world-class aptitude to spot and seize opportunities. They are leading the charge now into China’s underdeveloped service sector. This, more than manufacturing or exports, is where new jobs, profits and growth will come from.

Opportunities also await smart entrepreneurs in less efficient industries like agriculture, in getting food products to market quickly, cheaply and safely. In cities, traditional retail has been hit hard by online shopping. Struggling shopping malls are becoming giant laboratories where entrepreneurs are incubating new ideas on how Chinese consumers will shop, play, eat and be entertained.

China’s economy is now 30 times larger than what it was in 1991, and far more complex. The private sector 25 years ago was then truly in its infancy. But, there is still huge scope today for China to gain from its original policy prescription: prodding SOEs to get in line for reform while letting entrepreneurs meet the needs of Chinese consumers.

The author is chairman and CEO of China First Capital.

http://www.chinadaily.com.cn/opinion/2016-04/08/content_24364851.htm

The ‘children’ of Deng Xiaoping — Toronto Globe and Mail

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The ‘children’ of Deng Xiaoping

From left: Yang Hongchang, Hung Huang, Zhuo Wei, Grace Huang, Wu Hai, He Yongzhi.

The other Chinese revolution: Meet the people who took Deng’s economic great leap forward

 

Deng Xiaoping was no Winston Churchill. He possessed a thick southern accent most people found nearly impenetrable, and was anything but garrulous. In fact, little of what he said was memorable or even original. His most-cited aphorism – “To get rich is glorious” – did not actually spill from his mouth; historians suspect its provenance can be traced to the West.

But in deed more than word, Mr. Deng was the linchpin in redirecting China’s economy away from the backward, centrally planned beast it had become under Mao Zedong. He set it on a path that would see decades of unrelenting growth and the creation of credulity-defying prosperity.

What he wanted to do, he said in 1978, was to “light a spark” for change:

Deng Xiaoping

If we can’t grow faster than the capitalist countries, then we can’t show the superiority of our system.

– Deng, 1978

And on many indicators, grow they did – more than the U.S

 

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He succeeded in spurring growth, and wildly so, marshalling the power of the world’s most populous nation. Now, 110 years after his birth – an occasion that its leadership has sought to celebrate with lengthy TV biopics and other remembrances – China is filled with millionaires.

But has the sudden influx of wealth made it happy?

Where chasing profit was once grounds for harsh re-education, the country’s heroes and superstars – Jack Ma and an entire generation of tuhao, or nouveau riche – are now, in ways both spiritual and economic, the children of Deng.

President Xi Jinping has consciously sought to present himself as the current generation’s version of Deng. But for many of Deng’s figurative progeny, wealth and happiness haven’t always come together. In a recent survey published in the People’s Tribune magazine, worries about a moral vacuum, personal selfishness and anxiety over individual and professional status were high on the list of top concerns about the country today. The poll reflected a pervasive cultural disquiet that has reached even into the ranks of those most richly rewarded by the Deng-led opening up.

“On the social level, money became the only currency in terms of personal relationships, and that’s a really sad reality,” says Yang Lan, one of the country’s top television hosts.

She points to “the lack of a value system” that she sees when she hears young girls “discussing how they would love to be a mistress so they can live a wealthy life before they are too old. And you see girls discussing these things very openly.” China, she says, needs “a new social contract.”

There is little doubt that those who no longer need to worry about making money are more free to criticize others, raising the spectre of hypocrisy. But pained reflection has been among the less-anticipated products of the wealth China has amassed. The comforts of financial security have provided a new space to rethink the path the country has taken and ways it has fallen short.

And as China’s economy slows to a pace not seen in decades, it also faces a moment to consider the sweep of its modern history – decades marked by the vicious turbulence of the Mao years, followed by the full-throttle race away from it inspired by Mr. Deng.

From 1978, the first year of the Deng-led reforms, China has been so thoroughly reshaped that even numbers struggle to do it justice. Gross domestic product has expanded 156-fold, the value of imports and exports is 727 times higher, and savings are up by a factor of 2,131.

The growth has been driven by an extraordinary – and massive – cohort of people who have turned personal quests for profit into a national obsession. “China has, in absolute numbers as well as percentage of populace, the most successful entrepreneurs anywhere in the world,” says Peter Fuhrman, chairman and founder of China First Capital, a specialist investment bank based in Shenzhen.

But even those who most warmly embraced the Deng mandate are now pausing for a second look at a country whose vast financial progress has become marred by other problems.

 

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China’s Newest Billionaire, My Buddy Laowu — Bloomberg

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Bloomberg story

It took my friend and client Laowu 20 years to build his business, but less than four months from the IPO in Hong Kong to reach dollar billionaire status. While I hardly doubted he’d someday make it, it certainly happened quicker than I would have hoped or guessed. You can read my account of this remarkable businessman, his humble beginnings and his high-flying real estate development company, by clicking here.

Laowu’s company, Hydoo, has had a torrid run on the Hong Kong exchange. The share price is up over 70% since the listing on the last day of October 2013. That’s lifted the value of his family’s shares to north of $1 billion. I hadn’t kept track of the stock price, so didn’t know my friend had reached the milestone. Bloomberg’s China Billionaires reporter called today to ask if I would comment for the story he’s doing.

That article can be found here and can be downloaded in PDF here.

 

 

Hong Kong IPO Today for China First Capital Client Hydoo

Hydoo Prospectus

Welcome good news today from Hong Kong’s capital markets. The Chinese commercial real estate developer Hydoo (Chinese name 毅德) successfully IPOs on the Hong Kong Stock Exchange, raising over USD$200mn in new capital. With IPO channels for Chinese companies mainly blockaded, it’s especially welcome to see a Chinese private sector company raising so much from the stock market.  In this case, the delight is greater because Hydoo is a client of China First Capital. We acted as Hydoo’s investment bankers raising USD$80mn from Chinese private equity firm Hony Capital.  Hony’s 2011 investment, based on today’s IPO price, is now worth USD$150mn.

In addition to Hony, China’s giant financial services group Ping An also invested before IPO.  In total, Hydoo raised USD$140mn (Rmb 860mn) of institutional capital before IPO. Over 60% of the IPO shares (worth over $120mn) were sold by underwriters ahead of time to so-called “cornerstone investors“, including two large Chinese SOEs, Huarong and China Taiping Insurance, as well as retailer Suning (in which Hony owns a share).

I’m happy for Hony and the other investors, but happier still for Hydoo founders, particularly its chairman, Wang Zaixing, known to friends and family  as “Laowu”, literally “Venerable Fifth”. He is the fifth-born of ten children all of whom played a part in building Hydoo. The family is originally from Chaozhou in Guangdong, and speak the distinctive Chaozhou dialect. But, they ended up after 1949 in Ganzhou, Jiangxi Province.

The business Laowu started 18 years ago is now worth over $1 billion. The first time I met him, I told Laowu my goal as his investment banker, and my emphatic expectation,  was that his company would be worth at least that much at the time of its IPO. Another priority of mine was that he and his family members would still hold majority control after IPO.  That too has been achieved.  They hold almost 60% of the now publicly-traded business.

For me, Laowu personifies in many ways the large economic changes China has undergone in the last 30 years. He started life as a long-distance truck driver and from that humble start saw and grasped an opportunity to build wholesale trading centers for the emerging army of small businesspeople in China.

I first met Laowu and his company in 2009. The business was then called Haode (豪德). It was then still an old-school Chinese family business. There was no corporate structure in the traditional sense. Laowu and his brothers, sister and nephews would pair up, or act independently, to do individual large wholesale trading centers around China. When I met them, the family had already done 19 such projects. All had done very well. At the time, I’d never met a Chinese private company as profitable over as many years as Haode.

Over the last three years, the company has been transformed into a more professional enterprise. Hydoo provides a useful excellent template for how a Chinese family-owned business can make this transition to a publicly-traded company. Part of that process was splitting up the family’s existing business between a group that would follow Laowu and become shareholders of Hydoo, and five other siblings who chose not to participate, but remain active in some cases building their own wholesale trading centers.

As the IPO prospectus puts it,  this division was “a complex, delicate process involving the allocation of assets or interests in the existing businesses among a group of closely connected family members, who decided to split up into two independent groups with diverging goals going forward. Under the special circumstances, no written agreements were entered into in respect of the Family Allocation and no valuation appraised by independent valuers was undertaken when negotiating the Family Allocation. Instead, the Wang Family Group placed their focus on more subjective, personal factors.”

Me and my firm played a small part by advising Laowu and his siblings on the pros and cons of being part of a company planning for an IPO. But, as you’d expect, most of this was done within the private confines of a large, closely-knit family.  Along the way, though, I gained a deeper appreciation of the unique ways Chaozhou people do business.

Chaozhou natives are rightly famous both in China and throughout much of Southeast Asia for their business acumen. They are often described by other Chinese as “the Jews of China”.  As a Jew in China, I tend to think the description flatters my people. Chaozhou people seem to have an instinctive and unsurpassed talent for making money and entrepreneurship. Look around the world at the most successful Chinese business people, including the leading business families in Thailand, Indonesia, Singapore, Malaysia and Hong Kong, and a large percentage, including Asia’s richest magnate, Li Ka-shing, Thailand’s richest businessman Dhanin Chearavanont  and Indonesia’s top tycoon, Mochtar Riady, are either from Chaozhou or are descended from people who immigrated from there.

As this suggests, Chaozhou people are able and willing to uproot themselves and chase opportunities. Laowu didn’t leave China, but in building Hydoo, he did venture far afield from where he and his family were raised. He saw very early and profited richly from an economic shift within China that few others noticed 15 years ago. At the time, much of China’s economic growth was centered in southern China, and large coastal cities like Shanghai, Shenzhen, Xiamen. Laowu looked inland, especially in Shandong Province, one thousand miles north of Chaozhou.

As the economies of Shanghai and big southern coastal cities began to cool, inland areas, led by Shandong, began to boom. Shandong’s GDP growth, over the last ten years, has been among the highest of any part of China. Shandong is a huge market to itself (population 95mn) as well as a vital crossroads for commerce between north and south, east and west in China. Laowu built large wholesale parks to accommodate thousands of small traders, creating new clusters of small-scale commerce and entrepreneurship.

When you visit one of these centers, you get the impression that half of Shandong’s gdp is going in and out the doors. It’s crowded and vibrant. Even the smallest traders own their own small shop inside the Hydoo centers. That’s Hydoo’s model: they build the buildings, and as they do, sell off most of the units to thousands of individual small traders. Hydoo helps them get mortgages and often acts as guarantor on the loans. This lets thousands of small businesspeople become property-owners. As the Hydoo centers thrive (and they all do, as far as I know) the value of the real estate rises.

I know of no other businessman in China that has done as much as Laowu to build wealth and provide an entrepreneurial hub for such a large number of people in China. Hydoo is now spreading across more areas of China. It’s is building huge new wholesale parks in Sichuan, Hunan, Guangxi, Gansu.

I see Laowu infrequently these days. But, I’m as impressed now as I was when I first met him by his accomplishments. He and his family founded a business back when China was a different and less developed place. They stuck with it, kept reinvesting and now, through today’s IPO,  own shares worth more money than I can imagine. But, more important for me is that they still own the business, still own the majority and so answer to no one else. As an entrepreneur who helped create and sustain so many other entrepreneurs, Laowu deserves nothing less.

 

“If You Are Going to Do Something, Do It Big”

The first thing that strikes you is complete geographic implausibility of it all. In a rural corner of China’s barren, sparsely-populated and dusty Loess Plateau, sits an enormous complex of factories, dormitories, roads, and train tracks occupying an area of 38 square kilometers (14.6 square miles, almost 19 million square feet). That’s over half the size of Manhattan, 58 times larger than LA’s Disneyland, three times larger than the world’s busiest international airport, Heathrow in London.

The site belongs to a single Chinese company. It’s private, been in business less than a decade, has come from nowhere to become the world’s largest manufacturer of a critical component used in steel production, with likely revenues this year of over USD$1.5 billion (Rmb10 billion), profits of over USD$130 million , and assets of over USD$2.4 billion (Rmb 15 billion).  It’s 99% owned by its founder and chairman, with the other 1% held by his wife and daughter. By any measures, it is among the largest private industrial companies in the world, and certainly among the fastest ever to get to $1 billion in sales.

Not only have you never heard of it, neither has virtually everyone in China. It’s never listed among the biggest private companies in China. Its owner is never included among the ranks of the country’s private sector billionaires. Just how unknown is this remarkably successful entrepreneur? Here’s one measure. Believe me, I’m a big nobody in China. But, a Baidu search turns up more articles and references to me and my company than to this company boss and his.  In terms of orders of magnitude, his company employs about 2,000 times more people than mine, and occupies a premises that’s about, well, 190,000 times larger.

I’m not going to disclose the company or the boss’s name. We’re in discussions with them, and it would be unprofessional to do so. None of my competitors, as well as virtually no credible PE firms,  have visited the company.

My purpose here is two-fold: to shed a little light on a remarkable individual entrepreneurial achievement and also to give some sense of the scale of entrepreneurial greatness in China. I find myself, more often than I’d like, drawn into discussions – occasionally arguments – with people in the US and Europe about how entrepreneurship in China is in a class by itself, compared to everywhere else in the world, excepting perhaps the US and Israel.

Entrepreneurs are more numerous here (over 70 million private companies) and the best ones, numbering at least in the thousands, have created more wealth and spawned more positive societal progress in the last ten years than any other single group of people on the planet. I live in a perpetual state of wonder, doing what I do for a living in China, having occasion to meet entrepreneurs of the caliber of this particular boss.

A little more about him. He is, by my eye, about as modest an individual as you would likely ever run across. The only obvious concession to his enormous wealth is a rose gold watch he wears along with standard-issue baggy Chinese suit. If he sat next to you on a plane, my guess is you’d pin him as the owner of a small hardware store, not the owner of the world’s largest manufacturing business for a component used in a lot of what’s for sale there.

His office is hardly palatial, and sits just above the oldest section of his giant factory complex. He never went to college, and has no engineering or technical background, despite founding and now running one of the more complicated large-scale engineering and manufacturing businesses you’d ever hope to see.

Everything about the man, except his ego, is huge. “If you are going to do something,” he tells me, “do it big.” This applies not only to the huge area his business occupies, but the size of the investments he is making in its future. He is taking his business downstream and building, simultaneously, at least four huge new production sites, with total planned investment of over $3 billion. The local government is busy decapitating the top half of a silt mountain to create a level 500 acre site (about one square mile) for one of these new production areas. He begins building on it this year.

As I drove away from the factory area, I remarked to my colleague that the whole complex must be a source of intense interest at the CIA and National Security Agency in Washington, DC. Satellite photos will show the vast scale of this enterprise, as well as all the construction taking place. One recently-completed building is four stories tall and a mile long, all indoors.

My guess is the two spy agencies aren’t all that sure what exactly is being produced or planned here. I drove through it. Within a year, it will start producing steel products for the auto and home appliance industry.

How did this one entrepreneur build such a huge business is such a short time? Obviously, good timing, luck, some support from his local government and banks played a part. But, one key factor was a gamble he made in 2008 that paid off big time. When the financial crisis hit, his state-owned competitors (there were once three within a few hundred miles of him) cut way back on raw material purchases. This boss did the opposite. He exploited a steep drop in commodity prices, bought big and so locked in very large profits when customer demand began to pick up in 2009. Of course, had prices kept falling, he would have likely been bankrupt. His state-owned competitors? Now, all out of business.

Just about every “yuan” of profit he earns is poured back into expanding production. His bank loans are moderate –  about 10% of total assets. He’s only drawn down 70% of the credit lines provided by local banks. Measured by scale (factory size, employees, revenues) his company is similar to many larger SOEs in China. Asked to make a comparison, he explains that SOEs target only top line growth — girth for its own sake. He is far more focused on making money. The projected annual rate of return on newer projects is well above 25%.

He’s thinking about an IPO within two to three years. At a guess, his business could have a market capitalization at that point in excess of USD$8 billion. An IPO on that scale will bring him a lot of unwanted notoriety. He would likely instantly be vaulted into the ranks of the five hundred richest people on the planet. Billionaires in China rarely have it easy. Quite a few seem to end up in prison, or targeted by waves of bad publicity. For him, the real appeal of going public is the potential to raise an additional $1.5 billion to $3 billion to invest in further downstream expansion.

Whether or not my company works with his, it was one of the signal delights of my 35-year professional career to meet this entrepreneur, tour his factories and eat in his dining room.  At this moment in history, China is the entrepreneurial center of the world.

Why I Love What I DO

My love story began 25 years ago on a bus barreling down the Mass Pike highway in Western Massachusetts. It continues to this day, stronger and more captivating than ever. It has provided the joy, the passion, the inspiration, the endless study and purpose of my life. I’m talking about my love affair with entrepreneurs and entrepreneurship. 

Twenty-five years ago I was a newly-hatched baby reporter at Forbes Magazine in New York, on my first proper reporting assignment. An editor asked me to look into what was then still a small New England bus company with the unlikely name of Peter Pan Bus Lines. Against the odds, little Peter Pan was competing, and somehow winning, against America’s giant intercity bus company, Greyhound. I took one of their busses from New York’s dreary Port Authority station to the company headquarters in Springfield, Massachusetts. 

I sat down with the company’s CEO, Peter Picknelly. He gave me my first lesson in what it’s like to be an entrepreneur, the challenge and the delight of taking on – and eventually taking down – a big rival. To my surprise, as well as my editors, I was able to turn the conversation into an article that made it into Forbes, under my byline. My first. I was hooked– not so much with reporting and journalism. That was purely a means to an end. My life’s direction became meeting and learning from entrepreneurs.

At that time, I knew and cared little about small business and entrepreneurs. Both my grandfathers were founders of successful companies. But, growing up under their noses, I never quite appreciated just how special they — and their fellow entrepreneurs – really were. Only when I landed at Forbes, after years of studying Chinese history, then spending time in China and Hong Kong as a grad student, did it first begin to dawn on me how much I had to learn, and how deeply I should admire, the people who take the limitless risk to start businesses, find and please customers and, not all that infrequently, end up changing the world for the better. 

Fast forward to today, and I’m living a life that is the culmination of this 25 years of meeting, talking with, learning from some of the best entrepreneurs in the US, Europe and now China. In the four years since starting CFC, I’ve met in China more great entrepreneurs than in the previous 21. That is no small accomplishment, since among the entrepreneurs I met previously are Bill Gates, Miuccia Prada, Ken Olson and dozens more, less famous, but in many senses, no less remarkable and successful.

Entrepreneurs in China share much the same profit-making and opportunity-seeking DNA of entrepreneurs elsewhere. What makes them more remarkable, though, is fact that almost all got their start at a time when entrepreneurship, when starting your own company, was new, untried, often hazardous in China. They not only had to overcome the obstacles familiar to entrepreneurs everywhere (where do I find the money? How do I make a profit, feed my family and reinvest? What about my larger competitors?) but a raft of others that would daunt just about any other sane individual. 

Until comparatively recently, China’s economy was a near-perfect socialist vacuum in which entrepreneurship could not survive.  The economy was almost entirely in state hands. Licenses were not granted to private businesspeople. Banks would not lend. This was the world today’s successful Chinese entrepreneur was born into. There were no role models. The previous generation of private entrepreneurs had, in large part, been expropriated and excoriated or fled the country in 1949. 

Laws giving equal treatment to private companies were only introduced in 2005. Even then, private companies have had it very tough, in many cases. It remains a challenge. Taxes are numerous and high. Regulations can be as stifling as anywhere else in the world. Laws change frequently. Worker salaries are now growing by 25% a year or more. Every good business idea, almost within minutes, attracts hundreds, if not thousands, of competitors. Success or failure can be conferred at the whim of a local bureaucrat. 

And still, the great entrepreneurs of China keep marching forward, in ever greater numbers. A week doesn’t go by when I don’t meet or hear about a successful and accomplished entrepreneur. I’m just back from a five day trip to cold and barren Northwestern China. For me, it was far more enjoyable than a long weekend on the beach at Bali. 

During my trip, I met back-to-back with the founders of nine different companies, sharing hours of discussion with each, and a delicious meal with most. Each of the nine is successful, in industries ranging from cooking oil to laser components, from high-tech fiberglass threads to the world’s largest producer of a refined mineral used by steel mills all over the world. 

In my next blog post, I will tell the story of this mineral company and its remarkable founder. In eight years, since starting his business with little capital and no relevant experience or higher education, he has built a business worth, conservatively, $2 billion. He owns 99% of it. His wife and daughter the remaining 1%. 

Each of these entrepreneurs, like so many others in China and elsewhere, will achieve more in their lives than most, and likely leave a lasting imprint on generations to come. This was true for my grandfathers, whose success (one as the owner of a department store, the other as the founder of a button-making company) in the middle part of the 20th century created the wealth to send their children to college, get advanced degrees, and so ultimately provide a very affluent upbringing and even more possibilities in life for me and my brothers and cousins. 

The roots of so much of my own happiness are opportunities and experiences made possible by the business success of my two entrepreneurial grandfathers. It is the greatest of privileges for me to now work helping in a small way some outstanding entrepreneurs here in China.

Entrepreneurship in China– The Fuel in the Economy’s Engine

Fish bowl from China First Capital blog

China’s only abundant and inexhaustible natural resource is the entrepreneurial talent of its people. Nowhere else in the world can match the number of talented businesspeople, both in absolute numbers and as a share of the active population. That’s what I’ve learned in a 25-year career working alongside great entrepreneurs in the US, Europe and Asia. Today’s China is the most entrepreneurially-endowed place in the world. What that means, above all, is that China’s economy, propelled by robust entrepreneurial activity,  will prosper for the next several decades at least.

Entrepreneurs everywhere seem to share a common gene, and have more in common with one another than they do with the rest of the population in their home countries. They are more tolerant of risk, more compelled to try or invent new things, more able to see opportunities for profit, especially when they are invisible to others.

But, in China, entrepreneurs have some unique characteristics compared to those in the US and Europe. For one thing, until comparatively recently, China’s economy was a near-perfect socialist vacuum in which entrepreneurship could not survive.  The economy was almost entirely in state hands. Laws giving equal treatment to private companies were only introduced in 2005. Decades of pent-up entrepreneurial energy were unleashed. More great private companies have been started in the last ten years in China than in any other place in history.

We are still in the early years of the Big Bang of Chinese entrepreneurship. Everyone in the world is feeling the effects. Within China, private entrepreneurs now supply much of what China’s vast consumer market buys. Outside China, much of what’s labeled “Made in China” is produced in factories started and run by these new entrepreneurs.

There are some other important ways in which China’s entrepreneurs are different than those in US and Europe. A very minor percentage of China’s entrepreneurs are university graduates. They build their companies with almost no capital, and no access to bank credit. They face daunting challenges unknown to entrepreneurs most everywhere else: an absence of clear commercial laws or intellectual property protection, very burdensome tax and labor rules, holdover policies that give state-owned companies significant advantages.

Despite it all, every year, more of China’s population are going into business for themselves. Not all will build billion-dollar businesses. But, more will do so in China over the next several decades than anywhere else.

Partly, it’s simple math: China has both a huge domestic market and is the world’s largest manufacturing and exporting nation. But, these factors are themselves the product of China’s earlier entrepreneurial success, not a precondition for it. Earlier entrepreneurs created the fertile environment for today’s new private companies to thrive. The process is cumulative, and very fast-moving.. I see this every day in my work. We are meeting more great entrepreneurs now, on a weekly basis, than we did three, six or twelve months ago.

Another fact stands out when I compare these Chinese entrepreneurs to others I’ve worked with in the US and Europe. Chinese entrepreneurs do most everything single-handedly. They build companies without relying on a big management team or a circle of advisors. Decision-making is mainly based on hunch and experience, not on market research or focus groups. Even large private companies in China are managed like sole proprietorships. Nothing of importance is delegated. One person controls all the decision-making levers, casting the one and deciding vote on any issue of importance to do with operations, marketing, finance, strategy, sales. They are lone navigators, steering their businesses through very tricky waters, dealing with government officials, suppliers, customers, as well as their own employees.

Since starting China First Capital three years ago, I’ve been fortunate enough to meet several hundred outstanding Chinese entrepreneurs from dozens of different industries. Most are cut from the same cloth — crisp, confident, charismatic. With few exceptions, most do not have college degrees or much experience working for anyone else. They are born entrepreneurs.

Take one boss I met recently. He began his working life 30 years ago, after high school, as a trader. He was good at it, and saved enough, eventually, to go into manufacturing one of the products he was selling as a wholesaler to others. He moved up quickly, from producing basic low-margin commodity products to investing in his own R&D. He kept plowing profits back into the R&D work, and then to build new factory lines to produce a range of unique, patent-protected products he invented. These products deliver higher margins and target a larger, richer market than anything he previously manufactured.

The business is now growing very swiftly. Also typical, his son has joined the business, after getting a college degree abroad.  This boss, like most others I have met, knows how to work the system to his maximum advantage. His new products let him qualify as a high-tech enterprise, and so pay a much lower corporate income tax rate. The local government has shown its further support by selling him a large tract of land to build a new factory on, at a fraction of its market price.

This boss, somewhat uncommonly, has a very strong management team around him to manage finances, factory production and marketing. He is the force of gravity holding whole business together. It’s hard to imagine anyone else, except perhaps one day his son, could run this business as well. That’s another characteristic shared by most good entrepreneurial companies in China – they are never quite as successful once the founder steps down.

Another distinguishing trait of entrepreneurship in China – there are far more women bosses here than I ever saw in the US or Europe.  The ones I’ve met, along with being successful entrepreneurs, are also all quite elegant, attractive, even seductive. Those aren’t words usually associated with entrepreneurs anywhere else in the world.

According to the magazine China Entrepreneur, there are currently more than 29 million female entrepreneurs in China,  or about 20% of the total number of entrepreneurs in the country. Overall, China has more entrepreneurs, male and female, than most countries have citizens.

China’s economy continues to perform at a level never achieved by a major economy. Can this continue? I believe it can. The most emphatic reason is the entrepreneurial genius of so many of its citizens.

 

 

The New Equilibrium – It’s the Best Time Ever to be a Chinese Entrepreneur

China Private Equity blog post

As I wrote the last time out, the game is changed in PE investing in China. The firms most certain to prosper in the future are those with ability to raise and invest renminbi, and then guide their portfolio companies to an IPO in China. For many PE firms, we’re at a hinge moment: adapt or die. 

Luckily for me, I work on the other side of the investment ledger, advising private Chinese companies and assisting them with pre-IPO capital raising. So, while the changes now underway are a supreme challenge for PE firms, they are largely positive for the excellent SME businesses I work with.

They now have access to a greater pool of capital and the realistic prospect of a successful domestic IPO in the near future. Both factors will allow the best Chinese entrepreneurs to build their businesses larger and faster, and create significant wealth for themselves. 

As my colleagues and me are reminded every day, we are very fortunate. We have a particularly good vantage point to see what’s happening with China’s entrepreneurs all over the country. On any given week, our company will talk to the bosses of five and ten private Chinese SME. Few of these will become our clients, often because they are still a little small for us, or still focused more on exports than on China’s burgeoning domestic market. We generally look for companies with at least Rmb 25 million in annual profits, and a focus on China’s burgeoning domestic market. 

For the Chinese companies we talk to on a regular basis, the outlook is almost uniformly ideal. China’s economy is generating enormous, once-in-a-business-lifetime opportunities for good entrepreneurs.

Here’s the big change: for the first time ever, the flow of capital in China is beginning to more accurately mirror where these opportunities are. 

China’s state-owned banks have become more willing to lend to private companies, something they’ve done only reluctantly in the past. The bigger change is there is far more equity capital available. Every week brings word that new PE firms have been formed with hundreds of millions of renminbi to invest.

The capital market has also undergone its own evolutionary change. China’s new Growth Enterprise Market, known as Chinext, launched in October 2009. In two months, it has already raised over $1 billion in new capital for private Chinese companies. 

In short, the balance has shifted more in favor of the users rather than the deployers of capital. That because capital is no longer in such short supply. This is among the most significant financial changes taking place in China today: growth capital is no longer the scarcest resource. As recently as a year ago, PE firms were relatively few, and exit opportunities more limited. Within a year, my guess is the number of PE firms and the capital they have to invest in private Chinese companies will both double. 

Of course, raising equity capital remains a difficult exercise in China, just as it is in the US or Europe. Far fewer than 1% of private companies in China will attract outside investment from a PE or VC fund. But, when the business model and entrepreneur are both outstanding,  there is a far better chance now to succeed.

Great business models and great entrepreneurs are both increasingly prevalent in China. I’m literally awestruck by the talent of the Chinese entrepreneurs we meet and work with – and I’ve met quite a few good ones in my past life as a venture capital boss and technology CEO in California, and earlier as a business journalist for Forbes

So, while life is getting tougher for the partners of PE firms (especially those with only dollars to invest), it is a better time now than ever before in Chinese history to be a private entrepreneur. That is great news for China, and a big reason why I’m so thrilled to go to work each day.  


Multi-Tasking, Chinese Style

China First Capital blog post -- Qing Dynasty grissaille stype

For 18 months or so,  until last month, I tried burning my work candle at both ends. The goal was to play a constructive role both as Chairman of China First Capital, and CEO of Awareness Technologies. For me, it’s been something of a dream come true, this chance to work with two great companies, at different points in their lifecycle, in wholly different industries, with different home markets, different customers, different languages, and vastly different business models.  So much the better. 

It’s also exposed, in way that nothing else ever quite has, just how limited my managerial skills are. They are, at best, barely adequate for managing one business. Cleaved in two, they are woe-begotten. It probably also helps explain why bigamy never really caught on. Attention divided is attention corrupted. 

Or so I thought, until I began spending time with one supremely talented entrepreneur in China. He’s the boss of at least four different companies. There could be more, for all I know. Each time we meet, he mentions, in passing, another business that he founded and runs. Other than the fact they’re all based in China, they are all as different from one another as chalk and cheese. This entrepreneur owns and manages a very consumer goods company, a mining business, an advertising agency and a high-technology business.

And when I say “manage”, I mean manage. He’s not some absentee landlord. He spends significant time with each, and established each to seize what is a very large market opportunity. I only know in detail one of these companies, and it’s outstanding. My sense is that the others are no less so. 

So, how does this one guy do it? For one thing, he’s probably a lot smarter, and certainly more locked-in and ambitious than I am. He sees the world, so far as I can tell, as a vast and intricate delta, of multiple earning streams and innumerable opportunities for profit. He grabs only those that he knows he can readily seize – by being clearer, smarter, and richer than any competitor. 

Me, I look in my business life more for purpose than for profit, for the chance to work on large and complex problems, rather than ways to make a killing. It’s probably why I’ll never be as rich, or as managerially capable, as this Chinese businessman. Some businessmen enter new areas for the very sound reason of diversifying their sources of wealth.

This businessman does so because he visualizes the world as a series of P&L statements. He sees (better than anyone I’ve ever met) where the money is. Then he goes for it. He also chooses businesses that let him maximize his managerial skills, by setting a concrete direction, funneling in the capital, hiring strong management, and then waiting for the money to flow. 

Knowing him more and more, I’m convinced he’d never have entered the two businesses I’m now involved with: investment banking and enterprise software. Investment banking, especially for Chinese SME,  has too many moving parts, too many vagaries (for example, of market prices and investor predilections); enterprise software is crowded, and competitive, prone to technological disruption,  and has many smart people chasing the same limited supply of dollars. 

As I said, I like challenge. He likes making money. 

The kicker here is that it turns out, we need each other. I need him, because my investment banking business thrives by having the very best Chinese entrepreneurs as clients. He needs me to help him get additional capital to build the most promising of his businesses. I am equally confident we can get him that capital as I am that he will put it to very productive use, and so earn his investor a fortune. 

Of all the entrepreneurs I work with, this guy is the one that I’m most awed by, probably because he is so obviously so much better at this “CEO multi-tasking” than I am. He is very comfortable in his skin, and clearly having a great time in life.  It’s a joy to be a small part of his intricate, expansive and beautifully-engineered business empire.