Mr. China Page 16

  There was no point in trying to change China. We had invested the money there and we had to learn to play by its rules.

  On the other side, I found the Wall Street world-view almost as immutable as that of China. I had little faith in being able to persuade the Board back in New York to meet the factory directors on their own terms. When Wang Jinwen had taken out the letters of credit that eventually exposed us to a bill of ten million dollars, the money was still in the bank. We just knew that there was a commitment that would eventually come home to roost, but it could have taken months to find its way back to Zhuhai. The Chinese solution would have been to transfer most of the money out of the bank account quietly and in small amounts, until the bank noticed and froze the account or until there was no money left to argue about. We had done the exact opposite and precipitated a crisis by blustering into the bank’s head office. As soon as the bank’s senior people knew that there was a problem they made a couple of phone calls to the local court and froze our money while we were embroiled in all-night board meetings with hordes of lawyers discussing injunctions and Worldwide Mareva Orders. There had been a knee-jerk reaction from the US to hire battalions of private investigators and lawyers in a highly sophisticated response that was completely useless in dealing with the actual problem. Our whole case in Zhuhai rested on our belief that the bank had not been properly authorized to issue the letters of credit. But we subsequently discovered that, even though he had no authority to do so, Wang had chopped some of the documents with the company seal or ‘chop’. Chops are little round seals, which are rubbed on red inkpads and are needed to approve virtually every type of document in China from train tickets to declarations from the Politburo. Under Chinese law, a red chop can authorize a document regardless of whether or not the person who actually chops the document has any authority to do so. This had made no sense to us as Westerners used to seeing signatures as approval. In China, the system of using chops can lead to a separation of responsibility and power since no one can prove which individual actually chopped a document. Li Wei used to describe it as a kind of ‘collective irresponsibility’ but the system has been around for thousands of years and it is not about to change.

  As a final irony, Wang was arrested in the States several years later and convicted of some minor related offences. The last I heard, he was serving a prison sentence in California, but I was told that when he gets out, he can’t be extradited to China because conviction of the theft of such a large amount carries the death sentence and the US considers the Chinese judicial system to be unreliable. Who knows, he might even get to stay in America. The money was never found.

  Wall Street’s theory of ‘private equity investment’, investing in private companies like we had done in China, was based on two principles. Firstly, that the system of law and other controls are reasonably effective in dissuading business managers from helping themselves to the cash and secondly, that a management team will work hard over long periods for clear incentives. Under these conditions, the theory goes, the management team can be left reasonably free to run the business and report to a Board of Directors that sets budgets and reviews progress. We had applied this model in China – and it was obviously not working. Zhuhai taught us a lesson about the first assumption and I was starting to realize that the second was too simplistic.

  Pat’s world was dominated by the endless search for capital and, in the States, this was supposed to occur through open competition. But it wasn’t the same in China. Pat had a way of looking at our factory directors that he often wrote about and mentioned in speeches. He’d talk about a ‘management gap’ in China. His analysis was that, after the founding of the People’s Republic, China had essentially been closed to foreigners and there had been no true competition in the socialist economy. So managers in China had just been allocated capital and told what to make. There had never been any pressure to respond to a market or develop new products. Capital was simply assigned to whoever worked their government networks most successfully. There was no market regulation to funnel capital to the best managers and no pressure to perform. Once Deng took off the handcuffs, the natural Chinese entrepreneurs suddenly burst out into the open. The problem, Pat thought, was that managers seemed to go to either extreme. ‘If the management is too bureaucratic, you can’t get anything done,’ he’d say, ‘But, on the other hand, if they’re too entrepreneurial you can’t sleep at night. You may be in the components business one day and find that you are in the hotel business tomorrow.’ Or gearboxes. Or smuggling.

  It was true. Some of the factory directors were so stodgy that we couldn’t do anything with them. Early on, when we had tried to motivate them with increased salaries and a new bonus system, I had found that many of the factory directors were actually reluctant to take the pay increase. During the salary negotiation with a certain Kang, who ran one of our businesses in a remote country village in Sichuan, it felt as if our positions had been completely reversed. I started by offering him two hundred thousand renminbi a year, a big increase at the time, but he would only take a hundred. I eventually bargained him up to one hundred and fifty. Then, when I wanted to backdate the rise to January, he wouldn’t take it. After about twenty minutes of arguing around, we compromised on April. Living in an isolated factory up in the hills, Kang was unwilling to take a large salary rise. Everyone worked and lived together in the confines of the factory and Kang was not ready to break the old established mould.

  On the other hand, the more entrepreneurial managers were incredibly quick on their feet. Their thinking didn’t conform to a big picture; they were focused entirely on the short term. In China, new businesses often sprang up and withered in a matter of months. There might be a shortage of some particular product so factories were built in mere weeks, often creating a glut that caused many of them to fail. This short-termism might derive from there having been so much turmoil and reversal in China’s recent history, particularly during the Cultural Revolution. The extreme degree of uncertainty about the future might motivate people to grab what they can while they can. It not only creates the Wang Jinwens, who may take your money while you’re not looking, but also the Sus, who might erect a huge new gearbox factory without discussing it with anyone beforehand.

  So it was true. Most of the factory directors were either wild men, or so stodgy that they drove us to distraction. In both cases, we weren’t really in control. We owned the controlling stake in each business but we weren’t in control. Maybe we should have been firmer at the start, but by this time we just had to find some way of taking back the businesses, either by establishing trust with the existing factory directors or by booting them out and replacing them with someone else we could rely on. We had tried that up in Harbin, and it had been an abysmal failure. The next steps would require more caution, more intelligence, more guile.

  And then, of course, there was the other side to contend with. As losses mounted, more and more impractical demands came beaming in from the States. Headcount reductions became an obsession. Almost all Chinese state-owned businesses were heavily overmanned, but significant layoffs were virtually impossible. There was no social security, so what were these discarded people supposed to do? But still there was a knee-jerk reaction to headcount figures. ‘Three thousand workers? Cut the payroll!’

  I once received a note from one of our Chinese factory directors in the southern province of Hunan. Li was one of our best managers, a rare example of a factory director comfortably in the middle of Pat’s management spectrum, and we trusted him. He had attempted to implement cautious workforce reductions at the factory and provide some continuing payments for those who had to leave. But the message from Hunan told me that ‘Yesterday a worker arrived at the house of Mr Li with some bombing materials.’ Apparently a worker had strapped explosives to his chest and had barged into Li’s flat at the factory while his family were eating lunch and threatened to blow the whole place up if Li made him redundant. There had been a standoff lasting f
our hours, with police outside, but it had eventually been settled amicably and the worker had gone home. Our factory director was shattered and resigned from his post.

  I heard afterwards that the police had not taken any action against the worker. Dynamite, apparently, was reasonably easily available because it was used to blast irrigation ditches in the countryside and the authorities were terrified of provoking further unrest. Eventually, Li agreed to stay on, but there were no more workforce reductions. The episode was quite an education for me. The lack of a government social security system and the years of reliance on the work unit in socialist China meant that real redundancy plans were almost impossible to implement and they raised tough moral questions as well.

  Nevertheless, I felt that the directors back in New York were starting to think that I was full of bullshit when I went through these types of difficulties. I sensed that they thought I was throwing up roadblocks and making excuses for not getting things done. I began to think that it was only a matter of time before my own head would be on the block. One thing was clear: there wasn’t much time.

  So I went back to China in the spring of 1998. I knew that there were some heavy-duty fights ahead and I knew that they couldn’t be won with teams of lawyers sent in from the States. Harbin had been a disaster; this time we would have to be less gentle and fight with more cunning. The stakes were high, but strangely I felt calmer about the prospect. The shock of sudden illness had left me feeling that I should go back and do my damnedest, but if it didn’t work out, so be it. There were other more important things in life that I wasn’t prepared to lose.

  Nine

  The Battle of Ningshan:

  The Mightiest Dragon Cannot Crush the Local Snake

  From ‘Journey to the West’,

  an unattributed sixteenth-century

  Ming Dynasty novel

  As soon as I got back to China, I went down to Ningshan to see Shi. After we made our first investment down there, he had proven to be extremely resourceful and the business was our best performer. Shi had surprised us all at first when he managed to get the government chops so quickly after Pat signed the contract, but we soon got used to his energetic, buccaneering style and since the business made money we left him to get on with it.

  But on this trip to Ningshan, after a three-month absence, I was met by a group of agitated people. They looked nervously around and quickly drew me into a side doorway. In hushed voices, they gave me lurid descriptions of a second factory that Shi was building some miles down the valley. They had heard that Shi had ordered a large batch of moulding machines. ‘That means that he must be trying to set up in competition with us,’ they said darkly. ‘If you don’t stop it now, you’ll have a monster on your doorstep.’

  Back in 1993, on my first trip to Ningshan, I had landed at Hangzhou airport in an old propeller plane in the drizzle and mist. Everything was grey, cold and damp. There didn’t seem much point in visiting West Lake to take in the scenery, so we made straight for the mountains.

  It was the first time that I had been to Anhui, but I knew that this landlocked inner province in central China had vast mountain areas surrounded by dense bamboo forests that were still inaccessible by road. One of China’s holy mountains, Huangshan, the Yellow Mountain, was in Anhui. For a thousand years, it had inspired watercolours of rocky pinnacles with twisted pines and peaks stretching high above the clouds in the valleys far below. Further north, the steep-sided hills and bamboo forests gave way to gentler slopes that rolled down towards the Yangtse. The sixty million inhabitants of Anhui spoke with a thick accent, which was difficult to follow, but I had heard that they shared the northerners’ taste for good food and strong liquor and never passed an opportunity for a party.

  The tiny village of Zhongxi in Ningshan County sat high up in the mountains, miles from anywhere. At first the road to the factory crossed dreary flood plains, flat and monotonous, but gradually the road approached the foothills and we wound our way upwards through rolling countryside. Tea bushes with stiff dark green leaves covered the hills in neat rows up to a certain altitude where, over time, they gave way to lighter bamboo tints. As we climbed, the road deteriorated and the journey became slower. We frequently stopped to wait for local farmers to clear the road of huge piles of bamboo. The hillsides became steeper and rockier and the valley sides closed in. It was a wilder landscape than I had seen the year before when we’d visited Che’s gearbox factory in Sichuan.

  After about four hours, on the brow of a hill, the driver stopped for a cigarette. It was the highest point and marked the border between the provinces of Anhui and Zhejiang. The sky had begun to clear. We gazed down the stepped terracing in the valley in front of us. There was complete silence except for the sound of a man scraping about with his hoe some two hundred yards across the valley. A little stream fell down over the rocks and stones as it made its way under ancient stone bridges. The air was clear and odourless, a relief after the smog of the city. In the surrounding fields, I could see hundreds of winding paths worn flat by cloth shoes.

  We got back into the car and followed the stream down to Thousand Autumns Pass where there was a little group of houses. The chimneys perched over the slanting tile roofs showed the faintest traces of smoke. We drove on while scores of people laboriously planted and dug and sifted in the soil. The only signs of mechanization were the odd three-wheeled tractors hauling great loads of rocks up the valley. At last, over the brow of a hill, through the thin mist, I could see a stone causeway and, beyond it, a little hamlet between the steep sides of the valley.

  Zhongxi Village had maybe a hundred battered houses scattered around the stone road, a bank and a handful of shops. The buildings were basic. They looked damp and in a state of disrepair. The pavements were clogged with debris and young men sat loafing about on broken old chairs, smoking and idly watching the world go by. In the centre of the scene was a group of buildings protected by a high wall and with a large gateway facing the main road.

  As we went through the factory gates the sun shone down on to a perfect lawn surrounded by a stone pavement swept spotlessly clean. Pots of brightly coloured flowers were arranged in rows and circles. A short avenue of twisted ‘dragon-claw’ scholar trees led to a three-storey office building covered in white mosaic. The river flowed through the compound and, on the opposite bank, behind another expanse of lawn, there was a huge factory building set about with cranes and scaffolding. The faint whirr of machines rose from the workshops closer at hand. The path between the buildings was lined by rows of mature magnolias, almost in flower. Outside the workers’ dormitories, the gardens were divided by box hedges and there were miniature fruit trees dotted about. At the base of each tree, concentric rings of little pebbles, probably taken from the river, had been sorted by colour. There were rings of grey, fawn and white. On that first trip back in 1993, I had wondered who was behind this patch of ordered neatness up in these distant hills and I soon discovered a story of epic struggle.

  The factory started in the mid-1970s as a tiny workshop making plastic sheets. For years, a handful of workers sweated blood to make ends meet, eking out the most basic existence. Then one day Shi arrived in the village, a stranger from the distant flat-lands near the coast. In little more than a decade he had built a business that transformed the tiny hamlet and, by the time I first went there, it provided job security to the three thousand workers who lived in the village and the surrounding fields.

  * * *

  Old Shi was born in Jiangsu in 1947 in the low-lying coastal region just north of the Yangtse Delta. In the early 1940s Japanese invaders had smashed this whole coastal area but the occupation collapsed shortly before Shi was born, leaving chaos in its wake. I never heard Shi talk about his early days but they can’t have been easy. By the time he reached his twenties, the turmoil of the Cultural Revolution was at its peak. The local gossip was that Shi had met with some trouble in Jiangsu and had been sent up to Harbin where he had been locked up in a freezin
g cell. When I first heard the story, it was long before my first trip to Harbin, so I didn’t know that the winter there was so cold that many people freeze to death each year. The conditions in a Harbin prison in the Cultural Revolution are hard to imagine. When Shi finally got out, he came to Zhongxi as an outcast in search, so he said, for the peace to read. I think that it must have been more to escape and forget.

  Back then, the locals had absolutely nothing but for the clothes they stood in, a few cooking stoves, the plastics workshop and some wretched houses. Getting enough to eat was a constant worry and life was unremittingly harsh, especially in winter. The only source of work was farming or the tiny factory. Shi was interested in the business and soon the workers asked him to take over. He agreed and took out his first loan. It was five gallons of diesel to run the old generator. Electricity had not yet made its way up the valley.

  Several years later, Shi struck up a friendship with an old Japanese man who had retired but, for some reason, wanted to help a struggling Chinese business. With this newly acquired know-how, the tiny business signed up customers in China’s mining industry. Rubber seals were a particular problem on the hydraulic supports used in China’s deep coal mines. The whole mining industry in China had a terrible safety record and Shi soon found willing customers. In a short time, he was able to persuade the local Agricultural Bank to lend him thirty thousand renminbi, which, at the time, was about six thousand dollars.

  Once Shi had access even to these meagre resources, the business grew rapidly. Shi was a born optimist and his engaging character was perfect for a business leader. He was a great storyteller, always had a quick answer and he inspired his workers with his optimism, his theatrics and his appetite for risk. He was entirely self-educated; all the schools had been closed during the Cultural Revolution. He read voraciously and his conversation drew on the poems handed down by the ancients. He was in his early fifties when I first met him and he had a slightly wild appearance, with unruly hair and rather staring eyes. He seemed to lean forward at an odd angle when he talked to you. He smoked continuously, fretting about his health at the same time. In earlier years, he was given to wearing a jacket and trousers with enormous checks that didn’t quite match. Years later, after we had made our investment, these outfits raised the odd eyebrow on Wall Street and they disappeared quickly afterwards.