As succinctly put by Zhu Xinli, founder of the Chinese beverage company Huiyuan Juice, you must ultimately choose between raising your company like your son or selling it like your pig.
I agree. Chinese entrepreneurs and family businesses now face this difficult choice that will shape not only their companies’ futures but also that of the country. Family businesses, after all, make up about 90 per cent of China’s private enterprises, contributing more than 60 per cent of GDP, according to figures from Ping An Private Bank.
Four main factors make the “son versus pig” choice necessary. The first is that China’s relatively short history of entrepreneurship and family businesses, combined with a lack of management skills and organisational capacity, has created bottlenecks in some companies. This particularly affects those that became big very quickly, swept along by China’s economic growth.
Second, most of these family businesses will hand over to the younger generation within the next 10 years. This generation will not have access to the same amount of guanxi (a complex form of networking founded on mutual obligations, reciprocity and trust).
The guanxi that often played an important role in the fortunes of the company must be built up over time. The second generation (typically well educated, more westernised and less humble after years studying abroad) have a limited understanding of the nuances of Chinese business culture and state interventionism compared with their elders. They find it hard to grasp the implicit rules that form the foundation of guanxi, while the first generation finds it too hard to explain.
Third, all this is happening at a time when the Chinese economy is adjusting and changing its development model. Imagine a driver who was travelling at 130kph and has a hard time adjusting to a slower speed as he turns off the motorway.
The fourth factor, which complicates the others, is that Chinese entrepreneurs are caught between two worlds.
The Chinese want to get rich, to be recognised, so they are a little impatient. This is related to China’s rapid economic development. With their success closely tied to that of the country, many think all they touch turns to gold. It is also related to the US success stories of forming a company then selling it for an obscene amount of money. The advice they receive from consultants is based on the US approach.
On the other hand, they dream of sustaining their legacy, their dynasty; this is more European in approach.
Because of this “split personality”, to hear about a company such as Victorinox, the maker of Swiss army knives, is like shock therapy for Chinese entrepreneurs. It gives them a chance to see their companies from a different angle as it is the antithesis of their way of measuring success.
During a classroom discussion with high-level Chinese executives, the argument was made that by Chinese standards Victorinox is a small company that has not had impressive growth. After 132 years, the company has only SFr500m in total annual sales — something a Chinese company could achieve within five years.
My argument, though, is that except for its small size, the company is a success in every way. For most people, a fourth-generation family business is a real accomplishment. But that is not all. Victorinox is a world class, well-known brand with a healthy balance sheet and extensive sales worldwide.
Victorinox treats employees well and the owners gain some fulfilment from knowing the company is appreciated in its small home town of Ibach. A foundation holds 90 per cent of the company’s shares while the other 10 per cent go to charity. That means, for family shareholders, there is no possibility of frittering away the company’s wealth. All the profits generated are systematically reinvested or donated to charitable causes.
The company never borrows from banks and keeps liabilities to a minimum. This goes back to a golden rule laid down by the family’s great-grandfather, who saw liability-heavy companies go bankrupt in the Great Depression of the 1920s and 1930s.
Another key strategy is that Victorinox does everything counter-cyclically. When there is an economic boom, it maintains its position and does not expand much. In bad times, it accumulates inventory. For example in 2005 it bought Wenger, after the competitor for almost 100 years was close to bankruptcy.
I teach the case in my corporate governance class because Victorinox offers lessons for Chinese executives struggling to decide whether they should treat their companies like pigs or like sons. At the very least, it will help them broaden their definition of success. In these challenging times, China’s business owners no longer have the luxury of schizophrenic behaviour. They must decide who they want to be.
Professor Ding Yuan is vice-president and dean of China Europe International Business School (Ceibs)