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Opinion

Reflections on wealth and management from a home-grown private entrepreneur in China

(knowledgeatwharton.com.cn)
Updated: 2010-02-09 13:37
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Reflections on wealth and management from a home-grown private entrepreneur in China

Wu Jiayuan is typical of China's older generation of home-grown private entrepreneurs. Having started from the bottom of the ladder at Hubei Dengfeng Heat Exchanger to eventually become chairman of its board, his international business career couldn't be more different than his childhood during the 1960s spent in rural Da Ye, in the central province of Hubei. Hardship back then was no stranger and had a profound effect on the senior executive. "I am a simpler man than most," he says. "I grew up in a rural area, and even from an early age, life was never easy. Today, I treasure every stage of development in my life."

His business life certainly mirrors that of many entrepreneurs in China who have been ready and waiting for every move to open up the country's economy to Western practices and partners. When waves of privatization and management buy-outs swept through China in the late 1990s, Wu, like many others, was caught up in the drive to modernize. "1998 was a turning point in my life," he says. "I was head of the factory, but I hadn't gotten there by kissing the ass of local authorities. I was considering leaving Dengfeng that year after a friend offered me a job with his company in Shenzhen with an annual salary of 600,000 yuan ($88,000), 10% dividends, and a housing and car allowance. I almost left. But the then-secretary of the county CPC [Communist Party of China] inspired me to buy out Dengfeng and convinced me to stay. Eventually, I bought 60% of Dengfeng's shares."

Over the next 10 years, Dengfeng became the country's largest heat exchanger company by market share, supplying a range of customers, from auto makers to textile companies to medical instrument suppliers. It also began entering into joint ventures (JVs) with foreign partners, including one in 2003 with cooling equipment maker Chevon International Corporation of Singapore and another with Unifin of Canada to supply products to power utilities in 2005. Today, the company, with annual revenue of around 500 million yuan ($73 million) has a workforce of 1,200 employees.

In the midst of the financial crisis last year, a US multinational and Dengfeng began discussions about a new JV. "The financial crisis was a big test for me," says Wu. "It was also an opportunity to watch and learn. I wondered why - in the middle of a serious worldwide economic crisis - would a company from US be willing to invest in us. I realized that it was because we run an honest and disciplined operation."

In an interview with China Knowledge@Wharton, Wu shares his thoughts about corporate governance, information management, the conflicts that arise between Chinese and Western businesses, and the key to entrepreneurial success in an emerging market economy. As he asserts, "Companies and wealth ultimately belong to the society of which they are a part."

The following are edited extracts of the interview.

China Knowledge@Wharton: Some observers say China's private enterprises are struggling. What are your thoughts?

Wu Jiayuan: There is some talk about China's economy growing to be the largest in the world in 20 years, but I don't think achieving this is the most important thing at the moment. What is really important now is establishing a healthy, stable economic system and social order. We often hear about asset price inflation. Why is this? Because many manufacturing companies are investing their money in the stock market or property market, which means the manufacturing parts of their businesses are struggling.

China Knowledge@Wharton: What are the main factors contributing to the situation that many of China's private companies find themselves in today?

Wu: My view is approximately 70% of the responsibility lies with the owners of the private companies and 30% with societal factors, such as the allocation of resources, inequality in social status, and inability to hire effective resources and talent in the face of competition from State-owned enterprises. One of the biggest challenges impeding the growth of private companies in China is finding top talent. There is a traditional mindset in China that good students become government officials, and this has played a role in shaping people's career goals. You can see the impact of this mindset in the number of people registering for the civil servant examinations each year.

But issues of talent aside, social elements also have a profound effect. Some private companies owe their success to hard work and dedication, but others have become overnight successes through sketchy shortcuts and bribing corrupt officials. Because China's market is not mature yet, an increasing number of people choose to succeed through bribery or other illegal means.

China Knowledge@Wharton: What are some of the problems with the owners of private companies that you've just mentioned?

Wu: China has a long history and a splendid culture, but the market economy is a completely imported concept. We know very little about how to develop a business and compete in a market economy. Furthermore, impatience is widespread in China, and if manifested in company management, it leads to a host of issues and potential crises [affecting] a company's growth and survival.

China Knowledge@Wharton: How do you view corporate management in general?

Wu: When my friends and I discuss management, we usually use three analogies to describe the different mindsets of owners of private companies. Some view the company as you would a wife - as totally private and no one else can touch. Some see the company as a son, to be nurtured for longevity. Finally, some see it as an asset similar to a pig, and look for ways to increase its value. I lean most toward the third view. The relationship between you and the company is not the most important consideration.

In terms of the management of private companies, there are four main aspects. First is the design of a management structure, which is well regulated, [rigorously] designed and developed with a long-term horizon in mind. Second is finding ways to use the entrepreneur's skills in developing this structure.

These two aspects will be very difficult to address for those who look at a company as a wife or son. They won't trust outsiders and will be unwilling to develop transparency in the company. A transparent management system is key to a successful company, and achieving this involves a systematic effort to organize employees and the management team.

Third, you need to build relevant managerial processes, introduce standardization and have symmetrical information. Fourth is the application of management tools, such as an [ERP, or enterprise resource planning] software system - but the problem is only about 5% of Chinese companies that have adopted an ERP system use it for their day-to-day operations.

For most Chinese entrepreneurs, balancing the relationship between management and power is the biggest challenge. The traditional Chinese mindset sees power as the most important thing to achieve. For thousands of years, China has had a culture of power. However, I don't see management as power. Management is a capability, a skill. You can't manage a company well just through gaining a lot of power. It has to be a combination of the four aspects I mentioned.

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