Mr. China Page 18

  Eventually Shi broke the quiet and asked us what we would like to do. Pat said that Shi should resign to run his own business and that we should find someone else to run our factory. Shi would just remain a shareholder. There was absolutely no reaction. He just sat for what seemed like an hour, wreathed in smoke, silently brooding. Eventually rousing himself from his thoughts, he asked whether we had a replacement candidate in mind. This was the first time that Chang’s name was mentioned. Again Shi sat absolutely motionless, his hand in front of his mouth, eyes narrowed as he drew slowly and silently on his cigarette. He asked where Chang was from and when we told him that he had been the General Manager of Jinbei, Shi seemed to crumple slightly. Then he once more sat absolutely motionless for what seemed like an eternity with smoke curling up around him.

  Shi eventually hit back with a comment that Jinbei was a badly run company and that we were taking too much of a risk. By then he was stalling for time as his mind raced through a thousand calculations. After another five minutes, we gave him a simple choice: resign or be sacked. He extracted the odd concession and signed his resignation letter. We agreed to meet again the next day up in the factory to make a joint announcement to the workforce and so the meeting concluded.

  We subsequently discovered that, after effectively signing his own dismissal notice, Shi had been driven at lightning speed back to the factory, screaming down his mobile phone. His black Mercedes flew through the villages and fields as our wretched minibus laboured up hills and we checked the maps. As we drove into Zhongxi Village at dusk with Chang and his team, we saw that Shi had gutted the factory. The dormitories, which would normally have been alive with the sound of the evening’s cooking under way, were dark and silent. There was nobody there. The entire management team had been ripped out and sent down the valley. My heart sank. That night, just before I went to sleep, I was called with the news that the boilers on the other side of the river had been busy all afternoon. It looked as though a large number of books and ledgers had been burned.

  Next day at an early breakfast, the electricity suddenly failed. All the workshops and houses throughout the entire village were stranded in the watery grey daylight of an overcast dawn. At eight o’clock the workers arrived, but by now the word was out and everyone stood in doorways, gawping and gossiping. Notices had appeared all over the factory overnight announcing a four-day holiday and the workers gradually drifted away.

  Pat and I wandered over to the big moulding workshop on the opposite bank of the river where I had seen the cranes at work on my first visit four years before. It was dark and empty like the rest of the factory. Our prospects looked bleak. No electricity, an absent management and the workers sent home. As we walked past the deserted workshops along empty paths, great snowflakes began to fall mournfully from the leaden skies.

  After the initial shock we rallied. There was no way we were going down without a fight. The first thing to do was to demand our electricity back. Talking to the Village Committee would be a waste of time. They had been in Shi’s pocket for years after he had paid for some medical expenses for Madame Ye, the Committee Secretary. We went for the higher authority, the Government of Ningshan, which was located at the railhead some thirty miles down the valley. Pat headed off to dig out the Party Secretary whilst I stayed at the factory and ransacked the offices for the chops.

  I was to get to know the Party Secretary of Ningshan County quite well in the following two years. Secretary Wu was a rarity in the Chinese political system in that, to the extent possible within that world of constant intrigue, he appeared to say what he thought. In a tight spot, Chinese officials often disappeared from the scene for urgent meetings that were mostly imaginary. Although the events up in Zhongxi Village could become a real hot potato for the local government, Secretary Wu made no attempt to hide. The removal of Shi, a prominent local businessman with friends in the Provincial Government, was a sensitive issue. He was a powerful People’s Deputy well connected in the provincial capital of Hefei. But on the other hand the joint venture accounted for a good proportion of local tax revenues, so he couldn’t risk a fight with the foreigners. Wu was in a difficult position and he knew it.

  Unusually tall for a Chinese, Secretary Wu had a presence about him that was only slightly diminished by hair that absolutely refused to sit flat and an enormously long fingernail – which seemed to be reserved for ear-scraping – on the little finger of his left hand. He poured some tea and listened politely to Pat’s explanations. Deftly sidestepping the real issue, he replied that the choice of the manager of any business was up to the Board so he couldn’t comment on the specifics. However, as the leader of the local Party Committee, he had a duty to protect foreign investors. Therefore we could have our electricity back.

  Back in Zhongxi Village, an agitated crowd of several hundred had gathered outside the gates of the factory, milling around among the potholes and craning their necks to read the notices announcing Shi’s resignation. Reactions varied from angry disbelief to barely concealed glee but the underlying anxiety was palpable.

  Shi had disappeared and throughout the day his brooding presence loomed in the background as we tore through the offices in search of the chops. Eventually we found them, and, by close of play, we had at least secured the bank accounts, although we found out later that several million renminbi had been wired out within a few hours of the board meeting.

  At dinner that evening, as we sat glumly over our chopsticks and mulled over the situation by the light of a few candles, the electricity suddenly came back on. This development was greeted with a huge cheer and shouts for more beer. Maybe things weren’t quite so bleak. Later someone called to ask if a delegation from Shi could come to negotiate with us, but in a moment of bravado we replied that there wasn’t anything to negotiate. We went to bed with our spirits lifted.

  Early the next morning Shi himself called to ask for a meeting with Pat. Shi arrived at the factory looking tired. He mumbled that the change had come as a great shock and some of his people had overreacted, but now he wanted to get back to business. By the time we left, the managers and workers were slowly drifting back. Round One had gone to us.

  Over the coming weeks, an uneasy stand-off prevailed. Shi and Chang developed an immediate loathing for each other but Chang appeared to be in control despite the sullen stares and disobedience of the locals as Shi lurked in the shadows, plotting revenge. On the surface all was normal, but underneath tempers were frayed.

  News started to trickle in about Shi’s rival business down the valley. Chang had driven past and told me that it was impressive, at least from the outside. It was much bigger than I had feared and that convinced me that conflict was unavoidable. There was too much at stake for both sides. At the end of December, Chang had taken one of the cars from Zhongxi Village and driven up to the gates of Shi’s new factory. The guards thought that they recognized the number plates and let him straight in. Chang had strolled around the workshops, asking the odd question, taking detailed photographs of the machinery and production facilities and, after about fifteen minutes, he calmly drove off again, waving cheerily to the guards as he left. I couldn’t believe his barefaced cheek. He might have been severely beaten if he had been caught. But we now had proof that Shi had broken the agreement that he had signed that he wouldn’t compete with us.

  By this time, Chang was spoiling for a fight. He felt that some of the locals were using blocking tactics against him and he became testy. Just before Chinese New Year, I came down to the factory to talk to the management team. On the way up to the factory, the driver complained almost continuously for the whole drive about what we had done to Shi. I told him that he didn’t know the full facts and that I planned to talk to the whole workforce. But he said, ‘If you speak a thousand words it won’t be worth one from Old Shi!’ so I knew that it was going to be tough.

  Even so, we convened the meeting. I felt that the managers should be told directly why we had kicked Shi out and have a chan
ce to ask questions. I tried to win them over but Chang was having none of it. He launched into a monologue, his already huge voice amplified by a set of outlandish speakers that were hopelessly outsized for the small room. He bellowed, ‘I’m the General Manager now, and I won’t tolerate anyone who won’t listen to what I say!’ As he started to list the various departments at fault, one man in the audience stood up and started shouting back. Chang demolished him in the ensuing shouting match, called him into his office and sacked him on the spot.

  The Chinese New Year holiday that year was an anxious time. I knew that Shi would not just go away, so we waited nervously for his first move. On 5 February he finally struck. All 138 members of senior and middle management, except for eight people, left the business en masse and went down the valley to Shi. I received despairing calls from our people in the empty offices. They couldn’t see how to carry on, but Chang seemed completely unperturbed. ‘We can get new people,’ he said. ‘I’ve still got my core managers and most of the sales force has held. What we need is a morale booster.’

  It was soon the fifteenth day after Chinese New Year, traditionally a time for fireworks. Chang did two things: he bulldozed the factory gates and ordered a colossal firework display. In China, imposing gateways were still taken as a sign of wealth and social standing. Chang had described the gates of the factory as tu-qi, meaning ‘earthy’ or ‘peasant-ish’. He was right; they were a bit shabby. It was strange that Shi had cared so little for the gates when he’d paid so much attention to the environment inside. Traditions were still strong in the village and the demolition of the gates and the posters of the new ones had quite an effect. The firework display brought in from Shanghai was the largest the valley had ever seen and lasted nearly forty minutes. Huge crowds came in from the surrounding countryside and gathered in a carnival atmosphere on the bridge across the river. The fireworks worked wonders for morale. Nerves were steadied by Chang’s cool defiance of Shi, the local warlord, and several people returned up the valley.

  Shi had clearly expected the business to collapse when he took out the management and had said so publicly. ‘One kick and the whole factory will come down,’ he had boasted, so the survival of the business surprised everyone in the valley and by then we knew that Shi had problems of his own. We guessed that he had planned to bleed the joint venture for some time as his own business grew, so when we kicked him out he lost a source of financing. There were rumours that he couldn’t make payroll in January. The atmosphere in Zhongxi changed. When the presses still pressed and the mixers still mixed, there was a growing sense that we could win. One lad, who must have been worried about job security, said to me, ‘Your enemy is now a frozen snake. Don’t let him thaw out.’

  For weeks we tried to get the government in Ningshan to enforce the non-competition agreement, but that would mean squashing a successful self-made local and, on a more practical basis, it could have meant more unemployment in this remote, underdeveloped and isolated region. After all, the dispute affected more than five thousand people. From the outside, the Government appeared indifferent to our arguments but somehow, despite the tangled relationships and cross-allegiances inside the local Party, a consensus slowly emerged. Secretary Wu had exerted enormous pressure on Shi to come to terms with us and, in early March, I was summoned to Ningshan.

  Shi and I met, in an atmosphere of great tension, to try and straighten things out. Chang, Li Wei and I arrived early and were ushered up to the top of a building in the centre of Ningshan. As we waited for Shi to arrive, I gazed out over the rooftops to the hills in the distance. It was a lovely spring morning, the air was warm and the hillsides in the distance had lost the tired look of winter as the leaves began to unfold. Closer at hand, I could see the blue tiles on the roofs of the dormitories in Shi’s new factory. The layout of the trees and shrubs in the surrounding gardens, and the rings of coloured stones at the roots of the trees were quite unmistakable.

  * * *

  Secretary Wu arrived with the Mayor and told us that they would both personally attend the discussions. This was a good sign because it meant that the government was anxious to broker a settlement. Shi came in, looking nervous and irritable but during the discussions I could feel that his mind was still working very quickly. He peered at me over the table with a look of intense concentration. Secretary Wu had explained privately that he thought we could persuade Shi to swap his new rubber factory for the old jack factory. We might have to make a balancing payment, but it seemed like a sensible plan. We would end up with a bigger rubber business, free of the local competitor, and rid ourselves of the jack factory and the burden of its one thousand employees. I hesitated in giving a firm reply, but it seemed like a perfect solution so I made positive noises.

  On my return to Beijing, a sharp disagreement surfaced. I wanted to try to reach a deal with Shi and get rid of the jack factory. It was only useful as a currency exchange, but now we had dollars. But Pat insisted that we needed the export volume; the jacks were being sold to America. I thought that there was no way to survive in the long term with such a simple product and I was depressed when I lost the argument. I dutifully sent a note to Secretary Wu rejecting his proposal. Years later I heard that the news of this blunder had been greeted with gleeful incredulity in the Shi camp. It enabled both Shi and the local government to say that they had tried their level best to achieve a compromise but that the foreigners would not come to terms. It was a very close escape for Shi. We had let ‘the frozen snake’ thaw out. The local gossip was that we couldn’t have read Sunzi’s Art of War. We had opted for Sunzi’s worst option: a long war of attrition on enemy ground. Round Two had gone to Old Shi.

  About that time, we all had to troop back to the States for another quarterly board meeting. I knew that this one was going to be tough; the Board had set up an Advisory Committee and invited a couple of retired business leaders to attend as expert advisers. It was another knee-jerk reaction from New York. ‘We have operating problems; ergo we need a couple of experienced operators to tell our guys in China how to get it done.’

  It sounded sensible on the surface, but these new advisers were veterans of multinational companies, a bit like highflying factory rats. One had ended up running a huge chemical factory in Holland and the other had run HR for one of the biggest global companies on earth. I’m certain that they had been good at what they did; but at the board meetings, they naturally came up with questions suited to running chemical factories or the personnel function of a well-oiled global business machine. They just couldn’t grasp that we weren’t in control and droned on about installing ‘six-sigma’ quality controls and ‘constrained manufacturing’, whatever that was. At that stage I was more worried about making sure that the electricity wasn’t cut off and the accounting records weren’t thrown into the furnaces in a factory where our most sophisticated HR strategy was to invite everyone to an enormous fireworks party.

  ‘EBITDA’ became an obsession. It’s a kind of financial performance measure that tries to mix profits with cash flow, and we were tracking seriously behind budget. The Advisory Committee wanted to know why and they weren’t impressed with the explanations. I didn’t think that there was any point in squeezing out the last drop of EBITDA from a factory that was convulsed by a major battle between its shareholders. I wanted to keep the business stable and, in China, that meant keeping the workers busy even if we had short-term losses. If production stopped, we would be finished; Shi would be the only option for the workers and they’d all move down the valley.

  We were tracking behind in exports as well. Pat had come up with a hugely ambitious plan to increase exports to $22 million in that year and we were already hopelessly behind. The meeting became acrimonious after one of the directors said that there was no point in messing around with Excel sheets and taking ‘a foolish stab at numbers.’ Pat countered by saying that he had to maintain a sense of optimism and so we went round and round, in the same sort of circuitous arguments that I’d
had in China, with the familiar frustration steadily rising on both sides. After one session, again on exports, it got so bad that we were barely on speaking terms and there were long pauses in the board meetings as both sides glowered at each other or shuffled about with their papers. Once, at the end of a prolonged argument about exports, one of the directors from the pension fund looked up at Pat and abruptly adjourned the meeting.

  In a low voice full of menace, he said: ‘You wanna be Mr China,’ and after a deathly silence continued, ‘And Mr China ain’t gett’n it done in China!’

  It was awful. Pat had looked deflated afterwards but tried to brush it off. He muttered that the director who made the remark was supportive behind the scenes but had to appear tough in front of Rubel and the others from IHC. I was skeptical; it looked much more like the old Wall Street maxim coming out where, as they say, ‘You’re only ever as good as your last deal.’ It didn’t matter how many successful deals Pat had done in earlier days. By then they needed a whipping-boy and it seemed to me that the other directors from IHC had conveniently erased the fact that they too had spent months analysing China and doing due-diligence before we all made the joint decision to go out to raise the funds. I felt that, at that stage, there was no point in wasting time in internal arguments that had nothing to do with the real problems in China. There wasn’t the time. We were at the key moment in the first struggle that we might actually win. We knew what we had to do in China and we were out on our own.