Mr. China Page 26
Ren realized immediately that drastic action was needed so he spent his first month recruiting new people, revamping the offices to build a sense of pride in the workplace and designing business systems. The first few months went well and he collected about five million from overdue accounts. But there were things that Ren knew he had to do which would enrage the Chinese partner.
When he tightened controls over cash payments there were squeals of protest from all parts of the business. He had discovered that Factory Number Two had a substantial cash balance under their own control outside of the records of the central accounts department: a ‘little gold warehouse’ as it was known in Chinese. The main accounts department knew about it (and several others) but didn’t seem to mind that all over the factory there were cash balances outside their control. A thorough audit of the payments out of the ‘little gold warehouse’ showed that they were all related to the business and appeared perfectly reasonable. It was purely a matter of convenience; the employees just wanted to decide how to run their part of the business independently. So, although there was no evidence that the money was being used wrongly, it nevertheless made the business hopelessly unresponsive to central management.
Ren tightened employee regulations with new rules specifying misdemeanours that would result in dismissal. No one had ever been fired from Five Star so the new rules came as a shock. Most of them were recognizable in a Western context: dismissal for theft of company property, suspension for persistent lateness and so on, but some had been tailored to deal with the specific problems at Five Star. These included a ban on making insurance claims on behalf of the company and then keeping the proceeds; organizing gambling syndicates in the office; growing vegetables for personal use on the factory sites. Finally there was a new rule calling for dismissal for ‘fighting with customers’. Apparently there had been cases where point-of-sale girls promoting Five Star in supermarkets around Beijing had set upon customers who complained about the quality.
I could believe it. Over the years I had seen several instances of customers being insulted by shop assistants, most notably in the Beijing Friendship Store where, during an altercation with a customer over ice cream, a shop assistant threw a tub of it at the customer. Breaking free from the other shop assistants restraining her, she ran after the retreating customer and attempted to give him an enormous kick up the backside before being dragged off behind the scenes by her colleagues. Now it seemed that Five Star’s customers faced a situation where if they drank the beer they could end up with a mouthful of leaves and risk being assaulted if they complained about it.
Meanwhile, Pat was hell-bent on an export scheme to push Five Star in the States and had been spending months negotiating with a drinks distributor. There was a contrary argument that, since we had such difficulties in selling our beer in the Beijing suburbs, concentrating on the home market might do us more good. But he persisted and signed an agreement with the distributor. Pat made a big splash about the deal and appeared in a double-page spread in Forbes Magazine standing on Tiananmen Square near the Gateway of Heavenly Peace. For some reason the article was entitled ‘Mao’s Brew’. It took months to get the first shipment out of the factory and when it arrived in the States the distributor found that most of the bottle tops were rusty and that some of the labels were on upside down. We never sold a cent and, about three months later, the distributor went bust so that was the end of that.
Back in Beijing, Ren was becoming more and more unpopular and I knew that Madame Wu was getting nettled. But there didn’t seem to be any alternative so I encouraged him to plough on. The denouement in Ren’s attempts to restore discipline came when he finally tackled the accounts department. They were much too cosy, having worked together for years, and I had always been nervous about their habit of providing elaborately confusing answers to the simplest questions. When Ren issued a notice reassigning thirteen accounts clerks to other parts of the factory it provoked a rebellion and they barricaded themselves into the offices, refusing to come out. Aware that the factory was by now a tinderbox, Madame Wu arrived at the brewery. Fearing that the situation might escalate now that Boadicea herself had arrived on the battlefield I went over as well.
As I turned down the corridor towards Ren’s office I could hear her raised voice – I could have heard it a hundred yards away. Ren was obviously getting a severe larruping. As I walked in, she leant back in her chair and folded her arms, bristling with righteous fury. ‘I told you it’d be a complete mess if you lot got control,’ she said triumphantly, ‘and now we’ve got a right stir-fry of pubic hairs and garlic!’
Ren had arranged for Madame Wu to meet with the staff and I offered to go and support her. Surprisingly, she thought that would be a good idea.
I left several hours later, impressed with the way that Madame Wu had handled the situation. The accountants were in a state of high emotion, alternating between hysterical rage and sobbing, complaining bitterly about Ren’s unfairness to them after their lifetimes’ devotion to the factory. She was calm but firm and extraordinarily patient as she listened to their complaints. I realized that she was using the standard tactic of ‘talking them out’ just as Li Wei had done with the Union workers in Jingzhou; but I feared that this could be a marathon session. At her request, I left after a couple of hours in the late afternoon but heard later that the accounts staff had finally agreed to the reassignment after Madame Wu stayed until three in the morning listening to their outpourings of woe.
Over the coming months my role changed. Madame Wu and Ren became more and more disputatious and I became the buffer, adopting Lin’s role of former days. The state of the business, with depleted cash, beleaguered markets and low morale, had provoked a real crisis that drew us together. Initially I really couldn’t handle her but after a while I grew to enjoy how impossible she was. She was a class-act when angry and deep down, beneath the turbulent surface, I knew that she wanted Five Star to succeed even if she didn’t agree with our methods. Unfortunately, there were strong undercurrents in the relationship between Ren and Madame Wu. They were both from Shanghai and were of a similar age, but Ren had left for Hong Kong and an American education. His salary was astronomically high in comparison to her bureaucrat’s wage but he seemed to regard any of the petty perks that are the sole consolation for a Chinese offical as a type of corruption. He detested the fawning and flattery that, as a senior official, Madame Wu received from her other factory managers. Madame Wu in turn resented Ren’s high-handed style of management and felt that his capitalistic training had crushed out any real feeling for the ordinary workers. They were never able to get on.
The defining moment in Five Star’s crisis arrived early in Ren’s tenure as General Manager. Every year in China, exploding beer bottles seriously injure scores of people, even killing one or two who bleed to death before help can arrive. The glass used in the bottles is of poor quality and thin patches in the bottles’ walls become weak after they are thrown about in rough crates. Moreover, the bottles are reused many times and blasted with steam during the cleaning process. In the freezing Chinese winters, these extremes of temperature can produce minute but dangerous cracks. So in early 1999 the Government decided to act and introduced new regulations requiring breweries to use ‘B-bottles’. These new bottles were much stronger, made of robust glass and with a minimum thickness specified for the walls. They were also much more expensive. Nevertheless, the government directive was clear and notices were circulated specifying heavy fines if the regulations were not observed.
Ren invested heavily in new B-bottles. I asked him how he would be able to collect the B-bottles back from customers rather than being fobbed off with old, obsolete stock but he said he could address that with deposits from customers.
The new regulations were a disaster for Five Star. Except for a handful of foreign-invested breweries, every other brewery in China – including Yanjing, which had the Beijing Government as a big shareholder – refused point-blank to imple
ment the new regulations and continued using the old bottles. The authorities made a halfhearted attempt to enforce the rules by raising fines but the breweries refused to pay since everyone else was also breaking the rules.
Faced with the prospect of trying to fine the entire domestic beer industry, the Government retreated and business went back to normal. Customers demanded back their deposits and our precious B-bottles disappeared into a sea of broken glass. Within a few weeks, we had lost over 90 per cent of the new bottle stock and, together with it, the cash investment that we had made. Market share continued downwards and with loans already standing at several hundreds of millions of renminbi the banks withdrew any further support. Morale at the factory was at rock bottom and key managers were leaving. By this time, it was obvious that Five Star’s condition was terminal and, faced with this unpleasant reality, the Board decided to dispose of the business.
I was given the job of selling it.
After the euphoria of the earlier years, an ugly mood had settled over the beer industry. The newspapers dubbed it ‘the biggest bar-room brawl in history.’ More than a billion dollars had poured into the Chinese brewing industry in the three years to 1996 and the capacity at the high end of the market far outstripped demand. Foreign brewers realized that they had hopelessly over-invested but when they tried to tap into the medium-level market where demand was stronger they faced vicious price wars.
Hundreds of the smaller inefficient local breweries across China were virtually bankrupt but local governments, anxious about unemployment, kept bailing them out. These dying breweries churned out beer at or below cost and dragged down pricing in the whole market. It was quite impossible for any foreign brewer to make money at any level since local protectionism, creaking distribution systems and conservative consumer buying habits meant that foreign brands failed to achieve any credible market share. The cold winds of reality about the Chinese beer market started to blow through boardrooms all over the world and, one by one, the foreign brewers fled, scrambling out of China with the same haste that they had shown in getting in.
Fosters bailed out first at a fraction of their original cost, followed closely by Bass. Carlsberg and Asahi followed suit, selling their businesses to local brewers. Becks got embroiled in a trade-mark dispute and the others were caught with no exit and facing years of operating losses. In this environment, the prospects for selling Five Star were bleak indeed. Nevertheless, I found introductions to the top managers of most of the multinational brewers in China to see if any of them might take on Five Star, but not one of them returned my phone calls. The only alternative was to look for buyers inside China.
The two top brewers in China were Tsingtao and Yanjing. They each produced about a million tons of beer a year and were locked in a bitter struggle for the number one slot, using different statistics to show that they were the largest. Both companies had gone public on Chinese stock exchanges so they had plenty of cash and started making cautious plans to buy up breweries in other parts of China. Tsingtao bought a brewery in the western city of Xi’an and another on the banks of the Yangtse at Yangzhou. Yanjing ventured further south with an acquisition in Hengyang. But these were all timid first investments in Chinese-owned businesses and neither had attempted to purchase a large brewery from a foreigner. However, there weren’t many options, so I arranged a visit to Tsingtao.
The Tsingtao Brewery was the first PRC company ever to raise capital on Hong Kong’s stock market when, in 1993, it netted an equivalent of sixty-five million bucks. Shortly afterwards it came out that Tsingtao’s management had taken the cash and, instead of investing it in the brewery as they had promised, had lent it to their friends – who happened to be property developers. Investors were outraged but there was little that they could do as the management retreated to Tsingtao and ignored the furore. However, the Central Government was embarrassed by the scandal and eventually the Tsingtao Municipal Government kicked out the old management team.
The episode had a lasting effect on the town. On the northern side of a little peninsula that juts out into the sea, across from the old town of Tsingtao with its quaint German architecture, stands a vast new city centre. A cluster of glass skyscrapers has sprung up on the farmland and, across a well-appointed plaza with fountains and palm trees, the palatial offices of the Local Government, crowned with the red emblem of the People’s Republic of China, stare magisterially out to sea.
The man who was brought in by the Government to restore the Tsingtao Brewery’s tattered reputation was called Peng Zuoyi. I went to Tsingtao in the early autumn and spent an hour with him. Short, pugnacious, able and down to earth, Peng reminded me of Old Shi down in Ningshan. He had the same easy manner and charisma, combined with a quick mind and the inclination to make decisions. Above all he gave the impression that he was on top of his business and that he was enjoying it immensely.
I was cautious at the first meeting but my hopes leapt inside me when he said that he had thought of contacting us but that he ‘knew that we wouldn’t be interested in selling a majority of Five Star’. Thinking inwardly that he’d be welcome to the lot, I hinted that there might be some flexibility. He took the lead and the discussions progressed over the coming weeks, quickly moving on to substantive negotiations.
Meanwhile, through the autumn, Five Star lurched from one crisis to the next. After the banks withdrew support, cash quickly ran out and payment of wages became delayed. Inevitably, the desperate state of the business became clear to Tsingtao and they suspended negotiations. Madame Wu and I agreed that whatever happened we had to keep the business going; if it collapsed, Tsingtao would just wait on the sidelines until we were so desparate that we’d sell at any price. A war of nerves began.
A few weeks later the first blow fell in the form of a writ from one of Five Star’s main suppliers who were suing for payment of overdue accounts. It was from the Tsingtao Can Company, which seemed more than a coincidence to me. The news quickly spread and several other suppliers decided to get in on the act. I was in New York at the time and just before I stood up in front of the Board to run through the progress with Tsingtao I was handed a piece of paper. It said that Ren had resigned, the joint venture’s assets had been frozen by Court Orders, production had stopped, the Chinese partner had withdrawn the rights to use the Five Star trade mark, the banks had called their loans and the Beijing Environmental Bureau had issued an order to close down Factory Number One.
As soon as I got back to China I went to see Madame Wu. Faced with such a dire situation, and with Ren now gone, the quarrels swiftly became a thing of the past. We had to restart the business so we focused on the few remaining customers who were paying their bills and the handful of suppliers who would still give us credit. For four months we ducked and weaved, hopping around suppliers and bailiffs as they pursued us from bank to bank. Whenever we were tipped off that a new freezing order might have been issued we rushed to the bank, took the remaining cash and hid it in a new account out of the reaches of the Court officials. The Court then went back to issue a new search order and, if they found any new accounts, they’d come out with another freezing order, so we’d hurry off to the bank and move the cash on. Payment of wages got later and later, but that was nothing unusual for China and the workforce remained stable.
For four months we lived on a knife-edge expecting collapse at any moment, but for the first time we were the beneficiaries of the chaotic legal system: the Court orders proved too impractical to implement. We managed to restart the fermenters and Tsingtao realized that the business would not collapse. By May we were back at the negotiating table.
Two months later the contracts were ready and Tsingtao invited two hundred journalists to a signing ceremony in Beijing. The ordeal was still not over and Tsingtao’s lawyer demanded several late concessions. We refused point-blank and the journalists were kept waiting for two and a half hours as we haggled in a back room. Finally, Peng and I signed the deal. The relief was intense. We had retrieve
d more than twenty million dollars from the wreckage. Our Board was amazed by the price but I was just happy that it was all over. The arguments with Madame Wu had finally come to an end. The Financial Times summed it up when it reported the event. Asked how I felt about the whole Five Star experience, I had been lost for words.
‘Not thrilled,’ was all I could manage.
Twelve
The Iron Tree Blossoms,
The Cockerel Lays Eggs and the Rope on a
Seventy-two-year-old Cradle Suddenly Snaps
From the writings of a Song Dynasty monk:
‘Something extraordinary and difficult
to bring about may unexpectedly occur.’
c. Eleventh Century AD
The three struggles with Old Shi, Chen Haijing and Madame Wu all came to a resolution at about the same time. These main battles had been rumbling along during the same period together with smaller skirmishes elsewhere. In the end, during those three years, we replaced fifteen out of the original seventeen Chinese factory directors; almost a clean sweep. Sometimes we had to do it more than once when our first choice didn’t work out. And each fight was different: some took a couple of meetings with a bit of straight talking, but not many were so clear-cut. Most needed months, maybe a year, of laborious, convoluted negotiations which often came to nothing; then, and only then, if patience failed us completely, would we resort to the pitched battles.
Booting out the factory directors affected the company’s results almost immediately. In our worst year, when the battles were at their height, we reported losses of about forty million; a few years on, and the company was making profits of nearly twenty million and it was churning out cash. Of course, the turnaround was helped by some other factors: we were lucky with the market and Michael eventually figured out a system of proper incentives for the new Chinese managers. But if we hadn’t hurled out the original Chinese factory directors, it would all have come to nothing. Even with the turnaround, according to Wall Street’s equations the whole endeavour had failed dismally; the hole we had made for ourselves in the earlier years was too deep and the investors lost a lot of money. But on a human level it had been the ultimate turnaround in China, one that ultimately saved thousands of jobs. Somehow it had happened. Our iron tree finally blossomed.