Chinese society has long produced family business empires. A quick glance at any list of Asian tycoon families show them to be omnipresent, whether in Hong Kong and Taiwan or the further flung diaspora in SE Asia – including in Thailand and Indonesia where Chinese surnames have become so mutated as to be almost unrecognizable. It is not just Kwoks, Kweks and Lees, but the Hartonos and the Chearavanonts who are furthering traditional Chinese family values.
Everywhere that is, except China. It is fascinating to consider what is likely to happen on the Mainland over the next two decades, when the first generation of post-Deng businessmen finally start to retire. Many have noted the succession crisis facing these companies for some time; empirically, I have yet to meet a single 富二代 who has any intention at all of managing their parents’ business after their retirement. It is not just personal experience, either: a recent PwC survey showed some startling numbers contrasting modern China with its overseas counterparts.
Source: PwC Family Business Survey (2016)
Fewer than one in five Chinese entrepreneurs surveyed indicated that they intended to pass down the business. This compares with somewhat higher numbers in Singapore, higher again in Malaysia and Hong Kong (c. 40%) and far less than in the most directly comparable jurisdiction, Taiwan. Here, almost three fifths of families want their children to take over – and indeed, they have already gone through one or more generational handover.
Why is this? The obvious point to make is that, as with so many other aspects, China will not be following any known development paths. But there are probably a few more specific reasons too.
First, there is the entire structure of the economy and the perceived pathway towards exit. Speaking to SMEs, many will tell you that their end game is to list the company, which is true as far as it goes. But the more important point is that they see the government as the likely ultimate inheritors of any important business, either officially or unofficially. In this sense, the incentive for dynasticism is limited and becomes less relevant the more successful a venture becomes. Instead, monetization remains the key aspiration.
Secondly, there is the creeping issue of inheritance laws. Again, we have yet to see the first real fortunes and large scale asset inheritances being tested in the Chinese legal system and anecdotally, it is notable that increasingly numbers of the Chinese middle classes have ceased to give birth abroad, fearing what the implications might be when largely domestic legacies come to be divided up under Chinese law. For companies which have now been successfully “domesticated” through policies such as a stringent foreign exchange regime, this becomes the same question writ large.
Most intriguingly of all though is the prospect of meaningful cultural change. Overseas Chinese families have an unbending sense of filial piety even today, with many younger generations taking over family businesses despite not wanting to. Modern China, post the Cultural Revolution and factoring in the One Child Policy, much less so. Furthermore, children educated in western business schools clash with their parents over management style. And for many, the rapid change in the Chinese economy means that their parents’ businesses are just too damned unsexy, as one observer notes:
The transition is particularly evident in the manufacturing industry; many children who are educated abroad shun the manufacturing sector and prefer to seek opportunities in finance and other ‘cool’ areas. Fortune Generation estimates more than 65 per cent of children whose parents own manufacturing businesses don’t want to be involved in the industry.
Why put the hours in, when you could use your parents money for funding the latest absurd tech startup?
However whilst this is all bad news for champions of Chinese traditions and parents who want to see more of their children, this does mean an impending surge of opportunities for investors. It seems those PE funds really ought to be speaking first and foremost to the sprawling private wealth arms of the investment banks, rather than their corporate finance people.