The challenges of succession

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The challenges of succession



Lost direction? Many companies controlled by Chinese families experience succession problems as the leaders age but their children are not yet ready to take over the business. The fact that most Chinese families have just one child means tough decisions will have to be made when entrepreneurs consider retirement and succession. Hong Ye / for China Daily.


Lenovo Group Ltd may not want to disclose its succession plans but at least it has one. There's a good reason for the secrecy: Revealing who is going to replace whom puts the group at a disadvantage because it will encourage competitors to recruit its best people.

If history is an indicator, power or ownership transition is always difficult and most of the time, it will hurt.

"Chairman Liu (Chuanzhi) and CEO Yang (Yuanqing) realized that Chinese companies struggle with succession planning. The cornerstone for us is creating the next generation of leaders. The board worries about it," Kenneth DiPietro, senior vice-president of human resources at Lenovo, told China Daily.

Lenovo's board of directors, Yang and DiPietro discuss key moves within the organization once every year.

"We even create scenarios of possibilities such as 'what if we move this person to another department, what will happen?' or 'if this person is put here, what sort of results can we expect to see?' This helps us to build up the skills and capacity of certain people," he said.

The process, which was adopted four years ago, speaks volumes, especially when Lenovo is up against other Chinese mainland companies in terms of corporate governance.

Most Chinese chief executive officers and founders are young, the majority of them being in their 40s or 50s. Starting succession planning now doesn't carry as much importance as pursuing bigger profits and expanding into new markets.

The limitation of companies is not access to talent, DiPietro said. "The question is also not always about funding for mergers and acquisitions. As we move into new markets and new technology space, we ask ourselves: 'How are we going to execute with depth?'."

Now, 32 years after China's economic reform, the country's private sector, especially companies that have become globally competitive, will soon face the question of how to hand over to the next generation.

Liu Chuanzhi, Lenovo's chairman, is 67, and so is Ren Zhengfei, founder and president of telecom solutions provider Huawei Group. Zhang Ruimin, founder, chairman and CEO of Haier Group, a consumer electronics producer, is 62. Zong Qinghou, founder, chairman and CEO of Hangzhou Wahaha Group, a beverage maker, is 66.

Referring to succession planning in corporate China, Liu Shengjun, a professor from China Europe International Business School, said: "Usually they don't have a plan or they don't think it's necessary to have a plan. If they have a plan, it's usually poorly hatched."

He said the challenges that corporate China will face or is already facing are that founders are getting old, companies are getting too big to manage and companies are going global.

"Professionals are needed. Leaders with global vision are needed. But Chinese CEOs prefer to work life-long like Li Ka-shing. What they need are assistants rather than successors," he said.

When the 82-year-old Li was suddenly hospitalized in 2006, shares in his listed companies immediately sank.

In a joint study conducted on 250 companies controlled by Chinese families in Hong Kong, Taiwan and Singapore, Joseph Fan, a professor at the Chinese University of Hong Kong found that successions tended to go along with major declines in the stock value of these listed companies.

"If you hold shares valued at 100 yuan ($15) five years before the succession, the value will drop to 40 yuan by the time the company announces a succession," he said.

"It's a very challenging task. Most Asian companies have not done well. Those that have done well took 15 years to plan a succession," Fan said.

More than planning, succession requires founders to look deep at their lives and families too. "How many times they return home to eat, how many mistresses and children out of wedlock they have all these matter," he said.

Even if succession is well planned, the ferocity of the business environment in China posed extra challenges to companies, he said.

A change in local government officials, unforeseen recession or macroeconomic changes, or starting the succession in a hostile business environment can find companies unable to turn against the tide.

When Party member Lou Zhongfu first built Dongyang-based Zhejiang Guangsha Co Ltd in the 1970s into the multi-industry group it is today, he had the foresight to show his two sons the ropes in the hope that they could take over from him when he retires.

However, the listed Zhejiang Guangsha Co Ltd performed poorly over the years, which were predominantly affected by uncontrollable events. When the Dongyang local government changed hands in 2001, 2005 and 2007, even the well-connected Lou had to rebuild 'guanxi' several times over while watching the company's debt rise due to various outstanding infrastructure projects.

Since 1993, Guangsha Group has invested 400 million yuan in the construction of infrastructure such as Dongyang Children's Park, Xishan Park, Guangsha Baiyun Culture City and Tiandu City Huanle All Season Park.

The listed company performed poorly in the stock market over the years and reported losses of 177 million yuan in 2005 and 272 million yuan in 2006. In the same year, the company found itself embroiled in credit scandals over defaults involving large loans.

In 2010, the listed Zhejiang Guangsa started to install a new set of board members and is expecting to turn the corner, backed by an experienced team.

Fan expects fights for control of Chinese mainland companies to be more severe than their other Asian counterparts due to a vacuum in values in current Chinese society.

"We used to say family businesses tend to survive up to the third generation. With poor family governance, businesses in China can only last one generation," he predicted.

He predicts that most of the Chinese entrepreneurs may sell their businesses before retirement and transfer their capital out of the country.

"It's very unfortunate if this were to happen. You can sell assets but not brains. Intellect could not be passed down to the next generation," he said.

In addition, the one child in most Chinese families mean that it will be tough going for entrepreneurs to pass on to family members.

It's understandable that most founders of businesses in Asia and Europe desire to keep them within their families and partly also because of fear of betrayal.

The boardroom battle for control of Gome Electronics is a perfect example of an outsider hired as a professional to run the business who tried to seize control from founder Huang Guangyu, Fan said.

It's not surprising that most founders of companies believe that blood runs thicker than water.

Huawei's President Ren Zhengfei had almost similar experiences too. He promoted Li Yinan, a bright young executive, to be his second in command and potential successor. However, Li left Huawei in 2000 to start a rival company, which was later bought by Huawei in 2006.

For the first time, Huawei began disclosing biographies of its board directors in the group's 2010 annual report in order to be more transparent and "adopt a market-oriented corporate governance structure as part of its growth strategy".

While companies can outlive their founders, founders cannot live for centuries.

Source:China Daily

Chinese success story: Huawei Technologies

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Huawei Technologies Co., Quiet China Giant, Embodies Technology Aspirations

(JOE McDONALD, AP/THE HUFFINGTON POST) SHENZHEN, China -- China's quietest multibillion-dollar Chinese success story began when a former soldier founded a company in the 1980s to sell imported phone switches.

As sales rose, Huawei Technologies Co. invested to develop its own products, a radical step for a private company in the first decade of China's reforms to open its economy. But it paid off: Today, Huawei has grown into a major equipment supplier to phone carriers across Asia, Europe and Africa, with $28 billion in sales last year and 110,000 employees.

Now, this giant the public has barely heard of wants to become a consumer and business brand, moving into markets dominated by Apple Inc. and Cisco Systems Inc. It is marketing its own mobile phones and tablet computer and is expanding in the United States, backed by a global network of 20 research and development labs from Moscow to Silicon Valley.

"The consumer market, and especially the mid-range, is something we certainly will get into with our own brand," said Song Liuping, a Huawei vice president, in an interview at its tree-lined research campus in this southern Chinese city bordering Hong Kong.

In a country known as a cheap, anonymous factory, Huawei is a leader of an emerging group of Chinese companies that are creating brand-name technology in fields from telecoms to clean energy to medical equipment and starting to compete with Western industry leaders.

The newcomers can draw on a low-cost Chinese talent pool of engineers and scientists and support from a communist leadership that is pushing to transform this nation of farmers and factory workers into a creator of profitable technologies.

Chinese companies are climbing the technology ladder faster than Japan and South Korea did in past decades, said Oded Shenkar, a professor at Ohio State University's Fisher College of Business who studies Chinese companies.

"In 10 to 15 years, China could be where South Korea is now, as far as having a number of global champions," Shenkar said.

Rising Chinese competition could hamper hopes by the United States and other Western governments to spur growth and create jobs by boosting high-tech exports.



Huawei has graduated from selling sturdy, low-cost gear to developing countries in Asia and Africa to supplying top global carriers. That is adding to pressure on Nokia Siemens Networks, Cisco, Sweden's Ericsson AB and France's Alcatel-Lucent SA.

"Many view Huawei as their main competitor over the next few years," said Mark Koh, an analyst for Frost & Sullivan, in an e-mail.

Huawei has grown at explosive speed but has to cope with complaints it copied rivals' products and suspicions it is controlled by the Communist Party or is a front for China's military. In February, a U.S. government security panel rejected its purchase of a California computer company, 3Leaf Systems.

Huawei denies it is a security threat and invited Washington to investigate it after the failure of the 3Leaf acquisition.

The company was founded in 1987 by Ren Zhengfei, a former military engineer and one of China's most enigmatic business figures.

In a society where founders of Internet, retail and other companies far smaller than Huawei are celebrities, Ren never appears in public or talks to reporters. Forbes magazine estimated his wealth last year at $1.1 billion.

Huawei says it is owned by its employees but has released few details about who controls it, fueling questions abroad.

"The place where they have the greatest trouble is the West, where they face a lot of suspicion about their origins. It's clearly a handicap," said Tarun Khanna, a professor at Harvard Business School.

Ren started the company after his engineering unit was disbanded and he left the army, according to Huawei's February statement. He started with 21,000 yuan ($5,500 at the time) from his savings and a deal to sell phone switches supplied by a Hong Kong company. Demand boomed as Chinese carriers upgraded decrepit equipment at the start of reforms that would ignite China's economic boom.

Song said Huawei got into developing its own products almost by accident, launching a research arm only after its Hong Kong supplier was acquired by a state-owned company in 1990.

Early gear targeted rural Chinese phone companies and included a switching unit in 1994 marketed as "mouse-proof" for carriers that suffered from gnawed cables.

"Our main goal was survival," Song said.

Huawei spent a decade selling in China's countryside and developing countries in Asia and Africa, then moving into Chinese cities. It made its first sale in Europe in 2004 to a Dutch mobile phone carrier.

Today, Huawei works with 45 of the 50 biggest phone carriers.

On the consumer front, Huawei's latest gadget is the "MiFi" – a portable wireless modem the size of a deck of cards that creates a local area network for a half-dozen laptop computers. As it expands in the U.S., Huawei is also looking at opportunities in fields from finance and government to health, transportation and "smart grid" management of power networks.

The company's research-and-development staff has grown to 50,000 people and research spending is set at about 10 percent of sales, or $2.5 billion last year. It operates 12 joint development centers with partners including Vodafone Group, Deutsche Telekom, Japan's NTT Docomo and Egypt's Etisalat and has research ventures with Microsoft Corp., IBM Corp. and others.

Its corporate campus is a cluster of sleek, glass-and-steel buildings on a 325-acre (130-hectare) campus with an artificial lake. A training center where new employees spend six months was designed by star architect Norman Foster.

"They're generally a pretty impressive story," said Duncan Clark, managing director of BDA China Ltd., a Beijing research firm, who has followed the company for a decade.

"Some people in the United States see them as a creature of the government. But that's unfair, because if you look at how they've grown, it's almost despite the government, not because of them," he said. "They get export credits and other things, but it's wrong to dismiss them as a knockoff shop or a product of the army."

In contrast to major Chinese state-owned companies, which do most of their business in China and benefit from monopolies and other official favors, Huawei says it made 70 percent of its sales abroad last year.

In another break with tradition, Huawei also looks abroad for senior managers. Its chief technology officer was recruited from BT in 2009. The former CTO of Canada's Nortel Networks Corp. was hired last year to run research and development in North America.

"You have Chinese people based in Sweden and Western people based in Shenzhen. It's become a very globalized process," said Richard Brennan, a Californian who has worked for Huawei since 2007 and is deputy director of industrial standards.

Other Chinese companies also are starting to make a name for themselves as technology creators.

Mindray Medical International Ltd., also based in Shenzhen, competes with General Electric Co. and Germany's Siemens AG to sell X-ray machines and other medical devices in the United States and Europe.

ZTE Corp., a Huawei rival also based in Shenzhen, sells switching equipment, mobile phone base stations and handsets.

Shenzhen's success as a center for technology and finance has propelled its growth from a fishing village of about 30,000 people in 1980 before it was declared China's first "special economic zone" into a skyscraper-filled metropolis of more than 14 million.

Beijing urgently wants to nurture more such innovators to reduce reliance on foreign technology and create higher-paid jobs. It has promised grants, tax breaks and other support to promote "strategic industries" including clean energy, environmental and information technology, biotech and high-end manufacturing.

Some of its tactics have irritated its trading partners. The government is pressing global companies to hand over wind power, computer encryption and other technologies as the price of market access. Business groups complain Beijing's efforts to nurture local suppliers by favoring them in government purchases of computers and other technology violates the spirit of its free-trade commitments.

Chinese officials respond to some of the criticism by pointing out that U.S., European and Japanese companies also receive tax breaks, export subsidies and other help from their governments.

Song, the Huawei vice president, rejected suggestions its success is based on government support. He said it comes instead from market-driven decisions and a corporate culture that motivates employees with stock and quick promotions.

Huawei's February statement said some customers receive financing from China's state-owned banks. But Song said that while it gets some government grants, Huawei pays for most of its research out of its own sales.

"In the 1980s, there were hundreds of state-owned companies in the telecoms industry with Huawei, but they did not survive," he said. "If the state or military connection were the key to success, they should have developed very well, but they no longer exist."