Chinese family businesses at a crossroads amid structural changes in economy

The days of getting rich quick on lucrative export sales are over for China’s family-run manufacturers, as the economy shifts to one driven by domestic consumer demand

PUBLISHED : Friday, 20 May, 2016, 3:34pm
UPDATED : Friday, 20 May, 2016, 10:11pm

Mainland China’s accelerated transformation process to a “New Normal” and the concurrent economic slowdown that is hindering efforts by entrepreneurs to sustain profitability have ratcheted up pressure on family businesses to adjust their strategies and undergo revamps.

By definition, a family business refers to companies owned and controlled by a family.

In China, the majority of family businesses which started in the 1980s or 1990s are small and medium-sized manufacturers. They flourished between the late 1990s and 2000s, securing plenty of export orders while taking advantage of the mainland’s inexpensive labour and land costs to strike it rich.

However, since 2009 when the global financial crisis took its toll on a wide range of industries amid dwindling external demand, these entrepreneurs have been struggling to keep their businesses afloat.

“In hindsight, it was easy to start a business and make a fortune,” said Yuan Lamei, a Jiangsu province-based entrepreneur who owns a garment making business. “But it’s difficult to sustain growth. To be precise, you have to keep the businesses running because it’s your responsibility.”

Following breakneck growth for the past two decades or more, China’s economy reported an expansion of 6.9 per cent last year, the slowest in 25 years.

For family businesses, the slowdown translated into fewer orders from their clients, thinner profit margins, and even loss of capable employees.

Rental and labour costs, however, continued to rise despite the sluggish business climate.

Yuan said that it would be easier to shut down her garment businesses, but hundreds of workers would lose their jobs.

She began adjusting the business model five years ago, shifting the focus from the foreign market to domestic market by opening several retail stores, but all in vain.

The current mainland China leadership is implementing a major overhaul of the world’s second-largest economy, with the goal of driving future growth through buoyant domestic consumption rather than by exports and investments.

But the road to success appears convoluted, particularly for family-owned businesses.

Global professional services company EY pointed out that sufficient capital would be one of the key factors affecting the long-term growth of family businesses.

For Bob Li, a Shanghai entrepreneur dealing with exports of bags and suitcases, the shortage of funds to undertake a business overhaul has become a major stumbling block for his company’s further development.

“To sell the products on the domestic market you have to either open physical stores or create an e-commerce platform,” the 42-year entrepreneur said. “Either way, it needs fresh capital worth millions of yuan. More than that, it is a cut-throat market and I don’t have much confidence in Chinese’ purchasing power.”

On the mainland, access to funds remains a primary concern for small enterprises because banks, battered by risks of potential defaults, are reluctant to grant credit to them. A stock market listing is not an option for fund raising either, as securities regulator keep a tight grip on new share offerings.

If small business resorts to the shadow banking system, annualised interest rates could top 20 per cent and smaller-sized manufacturers couldn’t generate enough income to offset the lofty borrowing costs.

In some circles, the bosses of privately-owned businesses on the mainland used to have a reputation of being crude, the embodiment of the nouveau riche. Many were notorious for dropping millions of yuan at a moment’s notice on extravagant cars, fashion and jewellery.

However, Peter Englisch, EY’s global leader for family businesses, disagreed, describing Chinese entrepreneurs as enterprising business people who are highly respected in the Western world.

It’s a do-or-die time for the majority of the family businesses
Zhu Zhengrong, logistics company owner

In terms of industry sectors, 75 per cent of the first generation businesses set up on the mainland are in manufacturing, construction, real estate and trade.

Their founders amassed fortunes by taking advantage of policy liberalisation, foreigners’ penchant for low-priced Chinese-made goods, and export tax rebates to encourage outbound shipments.

But these entrepreneurs did not get lucky and see millions of dollars drop into their laps overnight.

According to the Hurun Research Institute, family business owners pay a high price in health, family life and even sleep. The rich bosses with a net worth of more than 10 million yuan (HK$11.9 million) slept two hours less than an average mainlander.

Chinese Premier Li Keqiang has been encouraging people to venture into their own businesses amid the belief that vigorous entrepreneurship could be a new driving force for the mainland economy.

Beijing has said that a “New Normal” pattern – slow but sustainable economic growth – would take shape as market-based reforms to redraw the commercial landscape and liberalise the financial sectors could benefit privately-owned businesses in their long-term development.

“It’s a do-or-die time for the majority of the family businesses,” said Zhu Zhengrong, an owner of a logistics company in Shanghai. “People like me got rich through hard work, but we won’t be able to thrive or even survive the New Normal because it certainly requires effective strategic planning and strong enforcement of the plans.”

EY’s Englisch said it would be vitally important for family businesses to enlist the help of external managers who understand the business and show respect to the founders.

“Interestingly, with growing educational and business sophistication in family businesses, the second generation is in an advantageous position to build a more diversified and globalised business and navigate the business through the transition towards a more sustainable growth,” he added.

The second generation at the helm of mainland family-run companies are now considering businesses with a global perspective. Some of them either buy foreign properties or allocate part of their funds to foreign equities to diversify their assets.

“For families who want to pass the business on to a second or third generation, building in the flexibility to allow younger leaders to align goals and strategies with their own interest is paramount,” said Englisch.

Harmonious family relations is another key element for a successful family business.

Six years ago, a bitter battle for the control of a family-owned leather company in Wenzhou, Zhejiang province, heightened fears about smooth succession of family firms on the mainland. Wang Min, chief executive of Fareast Leather Industrial with annual sales of 2 billion yuan, accused his father and brothers of fabricating documents and forging his signature to complete a change in ownership structure.

In the end, the father and brothers threw Wang Min into a mental institution to get him out of the way. With his wife’s help, Wang was able to escape from the hospital in something akin to a “prison break”.

Englisch said that developing trusted relationships would play a significant role in the growth of China’s family businesses.