Mr. China Page 9

  A few weeks later, Madame Tan called to say that there was a problem. ‘Our factory’s land, you know. It’s not registered in our name so we can’t put it in. Does that matter?’

  Michael had taken the call. ‘Of course it matters!’ he said. ‘If you don’t own it, who does? They’ll want to charge rent. Anyway, if you can’t put the land in, how are you going to pay for your 40 per cent?’

  Madame Tan said that the wireless factory next door owned the land. When I heard the news, I said, ‘That’ll be fine. We’ll just get Mayor Huang to sort it out. The land’s all owned by the State anyway, so it shouldn’t be a problem.’ We had several meetings with Director Jiang and his Investment Bureau and, later on, with Mayor Huang. He promised to instruct the Land Bureau to re-register the land. There was a lot at stake for the Municipal Government; if we made that first investment in Changchun, others would surely follow. But the weeks dragged on. There was no news and the tension mounted as Rubel’s arrival drew closer. Then, a week before he was due in Beijing, Madame Tan called to tell us that it was all off. A huge dispute was raging over the title to the land. Mayor Huang had thrown his weight behind Madame Tan, but the wireless factory had been lobbying the Changchun Party Committee. There was deadlock. We were confused. How could such a simple matter of a small and not particularly valuable piece of land become so complicated? It was puzzling and the timing was awful. At that stage, all we had to look forward to was Rubel’s reaction when he heard the news.

  I was not in China when Rubel arrived but I heard that the meetings were horrible. Michael called me afterwards in a state of despair. He had been given the task of presenting the progress of our investment programme to Rubel and his team of simpering assistants. Rubel kept butting in, firing distracting questions at Michael, not really concentrating on the answers and complaining that it was all too complicated. At one point, when Michael was going through the government-approval process for foreign investment, Rubel just wouldn’t let go of a particular detail. As Michael struggled to explain a process that many Chinese government officials themselves didn’t really understand, Rubel became highly agitated. In practice, local officials often interpreted the vague regulations in ways that suited local conditions, but this didn’t stack up with Rubel. He smelt a rat. When Michael, with increasing exasperation, said, ‘But Myron, you’re just looking at it through a Westerner’s eyes,’ the long-awaited explosion erupted. ‘But I am a Westerner,’ Rubel yelled, ‘I am a Westerner. How the hell else am I supposed to look at it? I wanna know where every investment project is in the system. I want a list of projects at each stage of the process. You must have that, so show me the list!’

  The Chinese staff were by then looking uncomfortably at their shoes. This was definitely not their style.

  ‘Show me the list!’ Rubel shouted, bouncing up and down in his chair.

  ‘What?’

  ‘Show me the list!’

  ‘But there isn’t a strict sequence to how things get done.’

  ‘Show me the list! Show me the list! Show me the list!’

  Apparently, the ranting continued for several minutes until Pat suggested a break. They were all exhausted by the time that Rubel left for Japan the following day.

  After Rubel left, we regrouped. The experience up in Changchun had taught us a lesson: the workings of Chinese business, and apparently even parts of the Government, were much more chaotic than had appeared from the outside. In retrospect, events and comments that we had passed over in the hills in Sichuan took on a new significance. I had been puzzled at times by the factory directors’ apparent disdain for our two fellow-travellers from Beijing – they were reasonably senior officials from the Ministry on a mission to bring money to the remote valleys, but often their requests for information had been brushed aside. The directors had been openly scornful of the Central Government bureaucracy, those ‘old men who squatted in their offices in Beijing’. When I told Ai Jian that I couldn’t understand why everyone seemed to ignore the officials from the Ministry, he used an old Chinese adage: ‘The hills are high and the Emperor is far away.’ It seemed as though the far-flung extremities of the ancient kingdom still paid little attention to the capital.

  After these experiences, it was fast becoming obvious that if we were to invest our money safely we would have to take a majority share in each of the businesses. That way we’d be able to retain a reasonable degree of control. Negotiating a majority stake would be difficult; but Pat said that he reckoned that most of the businesses we’d seen were so desperate for capital that they’d agree in the end. He was right. We eventually came up with a formula that we thought would be acceptable to both sides: the original factory directors would remain in charge of the daily operations but, in return for our money, we would always take more than 50 per cent of the shares and a majority on the Board. And Pat would be chairman.

  The summer that year in Beijing was unusually hot and wet; every day a cycle seemed to set in with blue skies at dawn and a gradual build-up of heat and humidity during the day that cleared again in the late afternoon with colossal thunderstorms. Often the clouds in the late afternoon were so thick that the city would be plunged into darkness as the rain came down in great black streaks. The rising tension in the weather through each day matched the wider mood as the months rolled on, but eventually it broke at the end of the summer when we closed our first deal.

  We finally made our first investment in a factory high up in a steep-sided valley with mountain streams, stone bridges and bamboo groves, tucked up far away in the central province of Anhui. It had been founded in the early 1980s by one of China’s new breed of entrepreneurs, a Mr Shi. Originally from the river town of Jiangyin in the flat-lands of Jiangsu, he had ended up in the mountains after the Cultural Revolution and had never gone back. His factory had always been outside the state-owned system so Old Shi had grown it from nothing, relying entirely on his own resources. Fifteen years on the business was making a fortune supplying rubber parts to China’s automotive industry.

  The negotiations to establish the joint venture were surprisingly straightforward. Somehow Shi seemed to know how to deal with foreigners; he was clear about what he wanted, he wasn’t hemmed in by a state-run bureaucracy and he made quick decisions. He was flexible and only dug his heels in on two points: our cash had to come quickly and he was to remain in charge. After a couple of months, we agreed a handshake deal: twelve million dollars for a 60 per cent stake in the business. The accountants and lawyers were dispatched to work out the details.

  During this lull in negotiations, I had to go to America for a commitment that I had been dreading. IHC wanted me to address a large group of investors in Los Angeles. My topic was China so it should have been easy. But the speaker immediately after me was Dr Henry Kissinger. The prospect of lecturing in front of hundreds of prominent investors and a man who had personally known Mao and Deng sent me into a paroxysm of nervous tension. As I got up to speak, I scanned the audience anxiously for the famous hornrimmed glasses reflecting the stage lights. In fact, Kissinger appeared neatly from one side of the stage after I had given my pitch and spoke for forty minutes, without notes, on the balance of global power between almost every significant country. Short and rather stout, he mesmerized his audience and was fallen upon by fawning millionaires once he had finished speaking. Fame, it appeared, was a more highly valued commodity in America than the odd hundred million. But ‘The Doctor’, of course, had both.

  When I arrived back in Hong Kong on the journey back to China, I was in for a shock. I knew that Old Shi, with his factory up in the hills, was a risk-taker, and that he had borrowed heavily from local banks during the boom that had been set off by Old Deng’s Southern Tour. But two years on, the government had started to rein in the overheating economy and Shi was under pressure from his bankers. While I was away, he suddenly arrived in Beijing and presented Pat with a draft investment contract.

  Pat had called me as I arrived in Hong Kong a cou
ple of days after Shi’s visit.

  ‘Yeah,’ he said, ‘Shi came up to Beijing with this draft contract, so I signed it.’

  ‘What?’

  ‘Yeah, I signed it.’

  A pause.

  ‘You know that the lawyers haven’t signed off on the wording yet?’

  ‘Yeah, I know.’

  ‘And the accountants are still checking the numbers?’

  ‘Well, you know that the contract isn’t valid until it gets chopped by the Government. It’ll take ages before Shi gets the approval.’

  ‘And the Board papers.’ I continued cautiously. ‘You know, Rubel’s never even heard of the deal.’

  ‘Look, I’m fed up with all the bleating from New York. What are we supposed to do with all that cash? Just leave it in the bank account? I don’t think so! So, stop worrying, it’ll take Shi months to get the approval. Anyway, how was I supposed to refuse?’

  ‘Well, you could have said “No”,’ I suggested.

  ‘Well, you know me,’ Pat said. ‘If I was a girl, I’d always be pregnant!’

  Pat received Shi’s jubilant call before the end of the week. After he’d met with Pat in Beijing, Shi had flown directly to Hefei, the provincial capital in Anhui, clutching his precious contract, and had procured the government’s red chop the same day.

  ‘The documents are all approved,’ said Shi. ‘When can I get the cash?’

  The telephonic board meeting linking New York with China that night resulted in a display of pyrotechnics that would have impressed even the Chinese. Storms of protest burst from the speakerphone in front of us. The other directors had never heard of the deal and Pat had sent the contract over to New York with a rather disingenuous attached note saying: ‘Here is the conditional contract that I signed in Beijing for discussion tonight.’ After Rubel had read the contract, he was beside himself, spluttering with fury. ‘Why is it conditional?’ he screamed. ‘Where is the conditionality? Where is it? Where is it?’ The shouts came out against a vague background noise of fists drumming on a boardroom table some eleven thousand miles away.

  Of course, the raging of the other directors could not change the facts. There was already a commitment to invest about twelve million within twenty-one days whether they liked it or not. Eventually, exhausted by the force of their own remonstrations, they signed off. An uneasy truce was declared. Pat had broken the logjam and further investments followed quickly. It was a smart move at the time but it did nothing long term for the relationship with our colleagues in New York.

  On 8 September 1994 the twelve million dollars were wired into Shi’s bank account in Ningshan. Late that day, I took a long walk up to the Great Wall and stared out northwards towards Mongolia over the ancient parapets. We had made our first investment. I felt exhausted, exhilarated and apprehensive all at the same time. It had been a bruising process. Would it all be worth it?

  Once the initial logjam had cleared and we’d figured our way through the bureaucracy, we were able to close other deals quickly. By the end of the year, we had invested the whole of the hundred and fifty million dollars in seven factories all over China. In the following year, 1995, IHC raised a further two hundred and sixty million and we invested that into more factories making components. We also used it to expand into another industry when we bought up three large breweries in Beijing. In the space of eighteen months, we had come from nowhere to be one of the biggest financial investors in China, right at the height of the China boom. We were fast becoming the nexus between the vast capital resources on Wall Street and the greatest growth story ever. Others had gone out and raised money, but no one had raised comparable amounts. Many of the funds that raised capital failed to invest it; their money was still parked uselessly in Hong Kong years later. No one else had managed to invest so quickly. It looked as if Pat had created his machine for bringing money from Wall Street to China.

  In the space of two short years, we had grown from three people sitting in a dingy office in a second-rate hotel in Chaoyang District on the east side of Beijing into a company with twenty businesses across China and twenty-five thousand employees.

  Pat seemed like a man on the brink of greatness.

  I was walking on air.

  Six

  Wind in the Tower Warns

  of Storms in The Mountains

  Tang Dynasty Poem by Xu Han:

  ‘Coming troubles cast their

  shadows before them.’

  They called themselves factory rats, those knarled old engineering types with beer bellies, checked shirts and nicotine-stained fingers. Before we found them, they’d spent the whole of their working lives as foreign expatriates, grappling with metal-bashing factories in developing countries all over the world. We hired them to form an operating team to get our factories in China really humming; twenty-five of them, grizzled and oily, tough old bastards who claimed they could hear the clink of a badly adjusted metal press a hundred yards across a factory floor. They didn’t exactly fit in with the Wall Street types, but the idea was that they’d be there to guide the Chinese factory directors and help them improve each of the businesses while we got on and raised more money. But somehow it never quite worked out like that.

  By the middle of 1995 we had completed our third round of fund-raising. With more than four hundred million dollars under management, we were the largest financial direct investor in China and we were bursting with optimism. After we raised the capital, we ended up visiting nearly two hundred factories throughout the whole country. Since that covered almost all the sizeable components businesses in China, we knew that we had invested in the best.

  During the money-raising process, Pat and IHC were clear about the strategy of buying up factories and consolidating them into the largest components company in China. The investors identified with the story. It had happened in the States so why not in China? Pat had told the investors that we would go for size; we would only use their money to buy stakes in businesses that were in the top three of their markets.

  As we trawled through all these factories, we found that Old Shi, with his business up in the hills of Anhui, was an exception. There were hardly any other privately owned businesses that had managed to get to the top of their markets; most of the other big components businesses were state-funded. Many appeared to be stuck in a time warp back to the 1950s and 1960s when the planners had first provided the funds. The problems surrounding state-owned companies had been at the top of the government’s agenda since the country had started to open up in the early 1980s. For years there was no profit motive so most state-owned businesses were hopelessly inefficient, incapable of developing new products when markets changed and massively overmanned. It made no difference to the factory directors whether the business made profits or losses; they still got the same miserable wage. Many state-owned operations were dying, drowning in a sea of debt and weighed down by thousands upon thousands of excess workers.

  But there were exceptions; some businesses made money and had a respectable market share. They were still overmanned and inefficient, but these problems had been masked in the boom years during the early 1990s when sales grew rapidly. Some had doubled in size in each of the three years before we invested; that meant that in the space of three years, their sales had grown by a factor of eight. We knew that they’d need a lot of work, but in the new climate of reform we thought that the factory directors would be receptive to new ideas. So we hired the factory rats and they started drawing up vast checklists for ‘in-process quality control’, whatever that was, and putting in computer systems. It looked as if they were getting to grips with the factories, so we left them to it. Pat went out to raise more money; by that time he had the cement, float glass and packaging industries in his sights.

  The results in the first half of 1995 hadn’t been good, but the optimism about the Chinese economy endured and there was little reaction from America. After all, it was only the first year of operations and the new working arrangements were b
ound to take some time to settle down. We’d delivered what we had promised: Pat had raised the capital, we’d invested it in good factories and had found a team of experts to run them, so there was no cause for complaint. I had no particular concern, but gradually I began to notice difficulties between our operations team and the Chinese factory directors. It was below the surface at first; just a vague feeling that they weren’t getting on, or that there wasn’t quite the right degree of trust between the two sides. But I still wasn’t unduly anxious; the factory directors maintained their optimism; and I felt that, with their years of experience all over the world, our old factory rats were bound to be a jaundiced lot and would take some time to grow to trust their new Chinese colleagues.

  But it didn’t work out like that. As the months rolled on, the factory directors continued to be reluctant to change the way that they ran their factories and a kind of resistance set in. Again, we didn’t take too much notice; it wasn’t entirely surprising – no one likes change. ‘Give them a few more months and it will sort itself out,’ I thought. But the situation became worse and the first signs of seriously choppy water appeared in the autumn. The business-planning sessions for the next year were under way between the operating team and the factory directors. By the end of the year, it seemed as if the simplest decisions, like purchasing testing equipment for a few thousand dollars, often resulted in protracted and acrimonious rows. Our factory rats began to get frustrated and angry. I increasingly found myself being dragged into disputes. Pat gradually became fed up with all the arguments. He was impatient to get on and when the operating team found it difficult to get the Chinese factory directors on their side he became annoyed.