Mr. China Page 8

  I never really figured out what made Bob Smith tick, but one thing was for sure: his slightly shambling walk and amiable manners were the perfect antidote to Myron Rubel’s hyperactive volatility, and he progressed sedately on his tour through China unperturbed by the whirlwind raging around him.

  Before their trip, Ai Jian had fixed up meetings for Rubel and Smith with the ministries in Beijing. We had also arranged to take in the best factories in Beijing and Changchun but Rubel didn’t want to see them.

  ‘Nah, I’ve seen enough factories for one lifetime,’ he said. ‘If the guy wants our money, get him to come and see us.’ So Ai Jian called around and the factory directors duly trooped in to see us. Fortunately Mayor Huang was in Beijing anyway, so that avoided the embarrassment of telling him that we weren’t coming up to Changchun.

  The meetings were stiff and uncomfortable; several were at ministerial level and kept to a set pattern. Although the rules at these types of meeting are less rigid than at a formal dinner, there is still an etiquette to dealing with high-level Chinese officials. When they are introduced to new acquaintances in a formal setting, the Chinese have an elaborate self-deprecating habit of talking themselves down. But the customary expressions of worthlessness from the host are expected to elicit strong protests from the guests who should respond with excessive compliments elaborating on the fame of their host, the lavishness of the surroundings or anything else appropriate that springs to mind. Of course, I knew that the shabby hallways and rusting pipework in the ministries were not exactly what Rubel and Smith were used to in their offices in New York. But my nerves were still frayed when the ministers made the standard opening apologies for the poor surroundings and they just nodded their heads in agreement.

  I sat anxiously through the meetings, waiting at each pause for Rubel’s next question. There is a strict hierarchy to the seating at meetings in China; the most important participants sit at the centre of the long meeting tables. Given the august company, Ai Jian and I had been consigned towards the opposite extremities, so I couldn’t even influence his translation with the odd undercover whisper.

  The meetings generally went well; Rubel asked his pointed questions and the Chinese gave their elliptical answers, but generally there seemed to have been some form of a meeting of minds. Towards the end of the trip the atmosphere grew gradually more relaxed and on the last day, just before Rubel and Smith left for the airport, we had lunch with the Mayor of Changchun. We had figured that it might be tempting fate to end up with a baijiu dinner. Ai Jian ordered the dishes so the meal was a relatively straightforward affair, with the only excitement – minor, at that – caused by a plate of sea slugs. Rubel fired off questions from every angle as Smith fumbled with his chopsticks and Pat and I finished the beer until, just before we got up to leave, Rubel asked his last question.

  ‘Well, Mr Mayor, we are very impressed with you but we’ve heard that officials in China move about a lot. So if you move to another city how do we know that your successor will follow the same policies?’

  The answer came without the slightest blink.

  ‘Well, Mr Rubel, we are impressed with you but we’ve heard that executives in America move around a lot. So if you move to another company how do we know that your successor will pursue the same strategy?’

  The Mayor had delivered his reply absolutely deadpan and held Rubel’s gaze for a moment. Then, just as the tension was mounting, his face, with perfect timing, broke into a broad grin. To his credit Rubel laughed as loudly as the others but it had been a great put-down and probably a close call. I loved the self-confidence, the almost barefaced cheek of the new generation of Chinese officials. Here was a man landed with the responsibility for a deadbeat industrial city in northern China with all its poverty and unemployment and decay, up against a visitor from a distant land who controlled sixty billion dollars. It was pretty obvious who held all the cards but the Mayor never once let the mask slip; I admired his gall in taking them on eye-to-eye. He seemed able to meet them on their own level with the same mixture of brazen self-confidence and bluff. In another life, Mayor Huang would have thrived on Wall Street.

  By the time that Rubel and Smith left China, they had seen enough to get them interested. Pat went back to the States late that August and went up to one of Rubel’s holiday homes in Vermont together with Smith. They sat on the porch in the late summer sunshine. That night, Pat called me in China and told me, ‘We got the deal!’

  IHC had agreed to go out and raise a hundred million bucks for the Chinese auto industry.

  With IHC behind him, Pat was on a roll. By October the documents were ready and he toured the States. He visited all of IHC’s major clients and, after about six weeks, I got one of his regular calls in Beijing. ‘So, how’s it all going?’ Several minutes into the conversation, he said, ‘Well, I’ve got eighty-five for you.’

  ‘Eighty-five?’

  ‘Yeah, eighty-five million. We got circles on eighty-five million of cash from investors. Should be up to a hundred and fifty by Christmas. You’d better be able to invest it!’ And with his characteristic roar of laughter, Pat put the phone down.

  Eighty-five million bucks. That seemed like a lot of money. Goddammit, it was a lot of money! Bucket loads, in fact, especially in China. In those days, raising that kind of capital inside China itself was virtually impossible whereas in the States it had seemed almost routine. Gradually, I began to understand the power of the money machine in America. There, every day, multimillion commitments were made by small groups of people and were based on, maybe, a two-hour meeting and some macro-analysis of countries that they had never visited. It just depended what was in vogue at the time. In the late 1990s, it was dot.com. Back then, it was China.

  Pat told me that during his tour of the States in early December, he had travelled up from New York to Stamford together with Rubel to talk to a large pension-fund investor. They went through their pitch and then went back to Manhattan, about an hour away on the train. When they got back to IHC, there was a message from the investor left on Rubel’s desk. It read; ‘Myron, you and Pat did a great job today. You got your fifteen million, Pam.’ That was it! The same investor came up with another ten million a few months later.

  Despite these surprises, it was the wealth of individual people in America rather than that of the institutions that really amazed me; I had no idea that such vast fortunes were controlled by families or individuals who had either made or inherited money. During Pat’s first money-raising tour, IHC had arranged for him to attend a breakfast meeting with a group of wealthy individuals in Houston. Although the smallest permitted investment was a million dollars, there were seven people at the breakfast all fumbling around with their toast and marmalade, dropping their napkins and shouting for more coffee and ‘grits’ as Pat gave his presentation. When he had finished, one of them asked two questions. Pat couldn’t answer the first as it was about some obscure tax loophole, but the next one was easy.

  ‘How many factories have you personally visited in China?’

  Pat launched into a set-piece exposition about how we had visited a hundred factories in a hundred days on our Long March across China. It must have been convincing. A few days later, on the basis of that hour-long breakfast meeting and two questions – one of which hadn’t even been answered – the investor signed up to invest five million dollars of his personal money and wired it across a few weeks later.

  I found it difficult to pull the people at Pat’s ‘Breakfast in America’ and the workers up in the Chinese hills into the same world-view. It seemed as if the factories, where raising a hundred thousand dollars could take years of effort, were on a different planet. Curiously, that was something that excited me. I found the real prospect of bridging that colossal cultural and financial gap hugely inspiring; we were about to embark on an adventure, that was for sure, but it was one that might bring hope to those forgotten communities that had no way to access the resources that they needed to survive. H
ere was a unique opportunity, the chance to bring capital into China on a scale that could rejuvenate businesses that employed thousands; and in a scheme where both sides could win.

  Things fell into place quickly afterwards. Once the ‘high-net-worth-individuals’ – as really rich people in America were known – had signed up for their eighty-five million, the big institutional investors moved in. Early in the New Year, it looked as though we would raise two hundred million dollars. But Rubel back in New York was nervous. ‘OK, I know you’ve seen all these factories, but how do we know you’ll actually be able to invest all this money? Two hundred is a lot for the first pull.’ Eventually, he cut back the commitments and we accepted a hundred and fifty-eight million dollars. Pat didn’t like it. He wanted to get as big as possible at the first strike, but he relented and at the end of February the contracts were signed and the first instalment squirted into our bank account. I still couldn’t quite believe it. The first money-raising round had exceeded my most optimistic expectations; once the celebrations had died down, we turned our minds seriously to investing it. It looked as if all the hopes were about to change into reality.

  With a hundred and fifty million bucks at out disposal, it wasn’t difficult to make waves throughout the whole industry. Although we had actually spent many months patiently researching China, building up the big picture and visiting factories across the nation, to the outside world it seemed as if we had suddenly burst onto the headlines from absolutely nowhere. We were all over the press. The Asian Wall Street Journal ran a whole page on us. The article, which was entitled ‘The Insiders versus the Outsiders’, compared our chances with another group of Hong Kong investment managers who had raised ninety million for one of the big Beijing-based industrial groups. We were the ‘outsiders’ from Wall Street up against the ‘insiders’ from Hong Kong who claimed to have all the right relationships in the inner chambers up in Beijing. The article was inconclusive but said that the ‘outsiders’ had a more coherent investment strategy; it might pay off in the long run if ‘the outsiders’ could navigate their way through the tangled relationships up in China and find the right businesses to buy.

  With all that money burning a hole in our pockets, the pressure was on to invest so I was relieved when I managed to persuade an old colleague from England to come out to China and help us figure out what to do. Michael and I had worked together at Arthur Andersen before he left to join a private equity house in London and I knew that he had much more experience with the nuts and bolts of investing than I had. Together, we hired a team of eight bright young Chinese graduates who had studied English or finance at one of China’s top universities. They helped us churn through the reams of figures we’d collected and figure out which were the best factories to invest in. I thought that we had the right team in place, but Rubel became more and more nervous as the weeks passed. He wanted to see some action and the telephonic board meetings between China and the States started to become tetchy.

  We had agreed to focus on Changchun to start. We had to get something done quickly before Rubel exploded. The Mayor was on our side and the factories up there were smaller than many in the other big cities, so we felt that it was the right place for us to begin. The Director of Mayor Huang’s special government office, Mr Jiang, accompanied us to each of the factories and entertained us in the evenings. But the visits were tough going and we made slow progress. The businesses were so confusing: sometimes it was even difficult to figure out exactly what the factory made; trying to understand their markets was verging on the impossible. We seemed to spend hours in freezing offices, squinting at schedules of figures that never quite tied up.

  The ‘entertainment’ in the evenings was also a strain. The Mayor had told Jiang to keep us happy, so there were nightly banquets which, though not quite on the scale of the Mayor’s epics, still involved multiple courses overspiced with garlic and washed down with baijiu, or beer if we were lucky. The parties afterwards were even worse. Night after night we were invited to dances at the various factories. Even in March, the temperature outside was still well below freezing and the heating in the dance halls never seemed to work. We all wore coats inside and, as we sat huddled on the rows of chairs on the edge of the dance floor, with our frosty breath illuminated by the disco lights, we were dragged out to dance with girls from the factory. Egged on by the doggedly well-meaning but hopelessly unobservant Jiang, the factory girls would come out, one after the other, in endless succession to ask to dance. It seemed to go on for hours, but I never had the heart to refuse. We’d stand swaying to the reverberating sound of the Chinese version of ‘Only You’ until midnight in a freezing dance hall with flashing Christmas tree lights taped to the walls, clasped in the arms of a female factory worker who was wearing three overcoats. With all the padding, my arms hardly reached round my dance partner’s back. Michael said that it felt as if he was ‘dancing with a bear that’d washed its hair in garlic’

  Michael and I spent many weeks in Changchun with Madame Tan trying to ‘put the numbers in the spreadsheet,’ as Pat had rather tactlessly put it to Michael. Pat was still focused on the big picture, impatient with the distracting details of each individual factory but convinced that the strategy would work as a whole.

  Madame Tan was the Director of the ignition-coil factory that we had visited on our first trip to Changchun when we’d met the Mayor. She was a jolly round-faced woman in her late thirties. Her ignition-coil factory was perfect for a first investment. The products were simple and Madame Tan thought that she only needed about two million dollars to push the factory into overdrive. She had just landed big orders from the new German passenger-car line down the road, so the market seemed secure. She just needed our money to buy more equipment to meet the new demand. As we waded through the figures and the weeks rolled on, the four huge iron chimneys at First Auto Works, with their spiky crowns on top, became a familiar sight on the horizon.

  In those days, foreign investment in China was almost exclusively in the form of a ‘joint venture’ where both the Chinese and the foreign side had a share in the business going forward. Generally, the foreign partner invested cash while the Chinese partner contributed the assets at the factory. Once the deal was struck, the contracts had to be approved by the Government; without the red ‘chops’ from the ‘relevant department’ no foreign investment contract was valid in China. But the regulations were confusing; even Director Jiang seemed vague about the details. It was just like at the university where many of the regulations were ‘internal,’ but this time it seemed as if the people on the inside didn’t really understand the rules either. No one could tell us which documents were needed and which of the municipal committees and commissions had to give their chop before final approval. There was a maze of confusing regulations requiring accountant’s certificates, tax registrations and valuation reports before the joint venture could be approved. Many government officials didn’t have a clue how even to start working their way through the labyrinth and whenever we asked what to do, each one gave a different answer.

  Sometimes Madame Tan could be equally perplexing. She had imported some specialist equipment from Italy the previous year but it was still locked up in a warehouse. When we asked to see it, she was evasive. During one of her many trips out of town, we persuaded one of the other managers to open the warehouse for us. We found that the machines had never been used; they were still in their packing cases. So why did she want more equipment? We had noticed that there was another factory on the same site as Madam Tan’s – the Changchun Number Two Wireless Factory – but she seemed extremely anxious to prevent us from meeting anyone from the wireless factory.

  At times, Madame Tan would suddenly disappear for a few days without any explanation. At first, I didn’t think anything of it; after all, she could have been on a normal business trip. But after one such absence she came to collect us from the hotel in a huge black stretch limousine. It was a Cadillac. I’d never seen one in China before. The c
rowds of early-morning bicyclists stared at us as we left the hotel. The car, with its enormous length and gleaming black paintwork, slowly wound its way with almost feline stealth around the potholes in the road and the huge clouds of steam that poured out of the manhole covers into the freezing air. But a couple of weeks later the Cadillac had gone; it seemed as if the ignition-coil team had suddenly fallen on hard times since they appeared to have no car at all. At lunchtime, when we went to a restaurant just down the road, we were driven over on an old ‘Liberation’ truck. We sat there, in our suits and ties, shivering on a battered sofa that had been dumped onto the back of the truck together with some filthy old sacks.

  Meanwhile, back in New York, Rubel was becoming increasingly nervous and unpredictable. As we struggled to reach a deal with Madame Tan and find our way through the maze of government regulations, the drum beats from New York got louder and louder. My heart sank when I heard that Rubel had arranged to come to China in May. But that was still two months ahead; we hoped that by then we would have signed the deal with Madame Tan and that it would keep him off our backs.

  In April, the deal was struck. It was small; just the right size for us to cut our teeth on. We agreed to invest a million dollars for 60 per cent of the business. Madame Tan would invest the factory’s land and buildings, plus the equipment, for her 40 per cent share. And she would continue to run the factory. It seemed like the perfect deal. Rubel was pleased and the tension abated. We were relieved as well; with the first deal out of the way, we could get on with the job of putting the rest of the capital to work.