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China's Private Entrepreneurs

Not Taking No for an Answer


Not Taking No for an Answer


Reversing a decade-long policy of state dominance of industry, China's private companies are reoccupying center stage. With fierce ambition and aggressive innovation, China's entrepreneurs are about to rewrite the rules of global business.



Not Taking No for an Answer

By Yi-Shan Chen
From CommonWealth Magazine (vol. 534 )

Recently, Jack Ma, the founder of China's largest e-commerce company Alibaba Group, caused a tempest at the Hong Kong Stock Exchange.

With great fanfare, he confidently declared that Alibaba Group would list on the local bourse. For the territory's stock market and investors, the envisaged listing of the e-commerce giant, worth more than US$100 billion, seemed like a mouth-watering apple. But once swallowed, it would demand a high price – relinquishing the principle of "equal treatment for all shareholders." Ma insisted that the Hong Kong Stock Exchange change its rules to accommodate Alibaba Group's board structure. He demanded that 28 partners, including himself, could nominate a majority of the board members, although they own only some 10 percent of the company.

This would have meant that Alibaba Group remains firmly under Chinese control even though its major shareholders are the Japanese telecom firm Softbank Corp., with a 36.7 percent stake, and U.S. Internet company Yahoo Inc., with 24 percent. Interestingly, Yahoo and Softbank were ready to forfeit their rights and supported Ma.

Ma did not expect that his "innovative" approach to shareholder rights would touch a raw nerve in the sensitive relationship between Hong Kong and Beijing. But what was originally a regulatory issue turned into a political hot potato. Consequently, Ma backpedalled and shelved the listing. Offering an apology to the people of Hong Kong, he acknowledged a lack of sufficient communication.

The Alibaba incident has shown the outside world just how brazenly overbearing Chinese private sector entrepreneurs can be. Throwing in the heft and might of a huge domestic market, they aim to rewrite the rules of business.

Even more so now that the new Chinese government under President Xi Jinping and Premier Li Keqiang seems to have reversed a longstanding renationalization drive, known under the slogan "the states advances, the private sector retreats." China's private companies are moving back to center stage.

The Comeback of China's Private Sector

Chinese state media have already released several trial balloons, reporting that the third plenary session of the Chinese Communist Party's 18th Central Committee will officially set the new policy this November, opening up six traditional state industries to private business. These are finance, petroleum, railways, electricity, resource development and public utilities.

Liang Xinjun, vice chairman and CEO of Shanghai-based Fosun Group, reckons that the just-opened Shanghai Free Trade Zone, the Chinese government's first step toward loosening its grip on the economy, will trigger a wave of company start-ups. A Fosun Group subsidiary has just bought the One Chase Manhattan Plaza banking skyscraper in New York from JP Morgan Chase & Co. The start-up wave in 2013 might become big enough to deserve its own moniker Liang predicts. "In the future we might see a 'Generation '13' emerge."

After more than three decades of economic opening and market reforms, China's private enterprises are the real engines behind the country's economic miracle.

Official Chinese statistics show that China has 47.24 million private enterprises and individually-owned industrial and commercial businesses. This is 89 times more than there are state-owned and collectively-owned enterprises. These private-sector entities provide 183 million jobs, 2.7 times more than the state-controlled sector.

Chen Dongshen, chairman of Beijing-based Taikang Life Insurance Co. Ltd., says that China is currently seeing its third wave of private entrepreneurs. Prime examples of the first wave are China Vanke Chairman Wang Shi, Lenovo Chairman Liu Chuanzhi and Ping An Insurance Chairman Ma Mingzhe. All three are top executives of large, formerly state-owned corporations or collective enterprises who steered their companies through a gradual privatization process, Chen explains.

The second wave is "Generation '92." In 1992, China proclaimed its Regulations on Joint Stock Limited Company, which encouraged the founding of private enterprises. As a result, tens of thousands of high-ranking cadres left their jobs in the state sector, taking with them their well-oiled connections with the government. In China's nationalized economy, they filled an industrial void. At the time, founding a company was tantamount to creating a new industry. Chen Dongshen, for instance, founded China's first auction house China Guardian as well as the first private life insurance firm Taikang Life. After serving on China's National Development and Reform Commission and the Hainan Development and Reform Commission, Feng Lun founded property developer Vantone Holdings Co. Ltd.

The third wave consists of highly skilled returnees from overseas, as well as technology entrepreneurs like Jack Ma of Alibaba; Ma Huateng, founder and CEO of Tencent; and Robin Li, co-founder and chairman of leading Chinese search engine Baidu Inc.

Chen Dongshen predicts that a new breed of world-class entrepreneurs will emerge in China as consumption and financial services become the mainstay of the domestic market.

What Separates Chinese and Taiwanese Entrepreneurs

Among the three generations of Chinese entrepreneurs, Generation '92 are now in the prime of their lives, and in a league of their own.

Feng Lun frankly points out that Generation '92 has intimate knowledge of the workings of the Chinese state-party system because they have worked in government agencies. As a result, they are able to see the big picture, are more tolerant and love to learn new things. Many of these entrepreneurs were friends long before they went into commercial business. Feng Lun, for instance, got to know Taikang Life's Chen Dongshen in 1984 when the latter worked at the Ministry of Foreign Trade and Economic Cooperation.

"We can use the language of academia to discuss problems. In contrast to the earlier generation of town and village entrepreneurs, we're China's first generation of educated business people. We use more strategic thinking, and we have the ability to go international," remarks Feng.

Feng placed Vantone's R&D headquarters in Singapore and spent NT$3 billion to invest in commercial space in the new World Trade Center in New York. Located on floors 64 to 69, Vantone's "China Center" is set to open in 2014 and will cater to high-end customers. Among others, a Singaporean restaurant with a three-star Michelin Guide rating is slated to move in.

"Although we are doing business, our nationalist sentiment is a legacy of Mao Zedong culture. We are dyed-in-the-wool patriots. The individual and the collective can't be told apart. The same goes for romantic love and society," says Yang Peng, secretary general of the charity One Foundation, who has had a chance to observe private entrepreneurs closely for some time.

Gregory Gibb, who worked for consulting firm McKinsey and now is with Ping An Insurance Group, says the biggest difference between entrepreneurs on both sides of the Taiwan Strait is determination and vision. Chinese entrepreneurs have great confidence and believe that they can change the whole world.

This means that Chinese corporate leaders can be very innovative and like to push the envelope, not taking no for an answer. Everyone has the ambition to become the world's number one.

Ruthless Innovation

Late Chinese leader Deng Xiaoping, the father of market reforms, once gave the cautionary advice, "We must feel the rocks as we cross the river." But China's new breed of corporate leaders takes a much bolder approach, often breaking new ground. If they need a bridge, they build one, and if they need a road, they pave one. Alibaba developed third-party payment platform Alipay ten years ago, because China's credit card association China UnionPay was not interested in the money flows generated by online shopping. With the tacit support from the Chinese government, Ma launched the experiment on his own.

This confidence that "anything can be changed" partly stems from the fact that China has an immature legal system and that social norms for ethical behavior in business have not yet formed. The Economist magazine has described China's burgeoning private sector as "a fast-growing thicket of bamboo capitalism," mainly because of private enterprises' dynamism and flexibility.

They gain space to maneuver by taking advantage of local governments' fierce competition for investors and legal gray zones. The downside of this "bamboo capitalism" is its frailness because the wind may blow in a different direction any moment. Therefore, the opportunists seize the moment, displaying a true killer instinct when it comes to marking their territory.

"Chinese entrepreneurs have a wolfish, highly predatory nature. They dare to strike. They will use any means to achieve their ends," remarks the chairman of a Taiwanese-owned company in Chongqing who has been doing business in China for nearly two decades.

However, it would not be fair to see the ruthless innovation of Chinese private enterprises in a purely negative light.

Chen Dongshen puts it bluntly: "Innovation is being the first one to copy." He notes that virtually all the entrepreneurs of his generation started out mimicking the products and business models of others. But after a long period of imitation, on top of drastic changes in the Chinese market, these companies began to come up with some astonishing innovations.

In the Internet business, for instance, American social networking sites Facebook and Twitter were still operating in the red and without viable business models, when popular Chinese messaging service WeChat had already begun to offer public accounts for companies or brands to engage with customers and fans directly. Developed by Tencent, WeChat became a profitable business model thanks to its link to Tencent's TenPay payment platform.

Following China's rise, companies, capital and talent have been hunting for opportunities and chasing success. Chinese private enterprises are absorbing talent and capital and assimilating systems at a speed and scale far greater than in Taiwan, or even Japan and South Korea.

Still, the question is: can these winners in the Chinese market change the rules of global business? The challenge is starting to present itself now.

The messaging service WeChat is one case in point. It spent big on celebrity endorsements and marketing in Taiwan. But since the Taiwanese harbor deep suspicions about eavesdropping by the Chinese government, most people use the site only to contact friends in China. Computer maker Lenovo and telecom giant Huawei have both hit the wall several times with overseas merger and acquisition plans due to concerns over "national security."

Whether we like it or not, we can't deny that China's multistep strategy of "import, digest, absorb, innovate and surpass" has already reached the final stage. As China breeds new generations of corporate wolves, we can't afford not to know and understand them.

Translated from the Chinese by Susanne Ganz