In 2006 alone, China-focused venture capital and private equity funds raised close to $20 billion from investors around the world. This figure does not even include global private equity and hedge funds such as Blackstone, in which the Chinese government has taken a stake and which undoubtedly will invest in Chinese companies. Indeed, $20 billion is a startling number for a country where the conventional forms of corporate finance—public equity, bank debt and bonds—are woefully underdeveloped. The term “venture capital” barely had an adequate Chinese translation 10 years ago—“private equity” still does not have one to this day.
This anachronism—one of many in China—manifests itself in unexpected ways. One of them is the significant shortage of management talent and leadership relative to capital. Although it is difficult to get a bunch of venture capitalists to agree on anything, they all lament that “in China, there are a tonne of business opportunities” and “too much money”, yet “not enough fundable people”. A recent survey by Accenture points out that most multinationals in China count recruiting and retaining good people as their biggest obstacle to growth. Lack of management skills, trustworthiness and the ability to scale are often cited. It is ironic that in a country of 1.3 billion, the people factor has become a limitation.
To understand this mystery, one needs to keep in mind that while these days, Shanghai is a lot more interesting and exciting place in which to do business than New York City (just ask anyone who has worked in both), capitalism in China is at best 20 years old and still very much in its infancy. Most Chinese people in their 40s and 50s, whose counterparts form the backbone of business management in the West, had their education interrupted by the cultural revolution and afterwards worked most of their lives in state-owned companies, where they held “iron rice bowls” and did as little as they could. It was not too long ago that I had to beg an attendant at the Shanghai Number 2 Electronics Store to show me products safely ensconced in a cabinet behind the counter, or with humble apologies ask waiters to pause their chatting and bring me a menu. My sister, who is in her mid-30s today, is one of the lucky few who had the opportunity to be trained in western management skills after she graduated from college in 1992. In her case, it was with Hewlett-Packard, one of the earliest joint ventures established by western companies in China. Like my sister, while Chinese capitalism has resulted in many individual contributors and some good managers, its short tenure has created very few experienced executives.
Aside from the skills and experience factors, another issue is the use of standard business practices and ethics. As aptly described in a plethora of China business books, more often than not, the signing of a contract is the beginning rather than the end of negotiation. Conflicts of interest and insider trades are opportunities to take advantage of, rather than challenges to manage, and minority investor interest is, quite literally, a foreign concept. Its eventual collapse notwithstanding, Enron would be considered a paragon of good corporate governance compared with many of the Chinese firms listed domestically and abroad. Coming from the modern business world, a western businessperson tends to forget that things were not always so orderly. The robber barons got their names for a reason. Imagine the blank stares one would get if he or she started to mouth off about Sarbanes-Oxley in front of the business pioneers of the western world.
Yet if one examines the drivers behind the people factor, it gives one pause in the short term, but hope for the long run. It is clear that many of the management and leadership issues are a result of China’s unique history and environment, and unlikely to have quick fixes. A western investment firm, wild-eyed over China’s exciting business opportunities but unaware of the people factor, is in for a rude shock—hopefully before it puts most of its money to work.
Over the long run, just as has happened in the West over the past century, institutions, laws and enforcement mechanisms will be put in place to provide incentives for proper business practices. They are good business for everyone because they promote fair and, more importantly, efficient and ultimately more sustainable growth, a goal that the Chinese government has finally firmly set its eye on.
One can also hope that the many Chinese managers in their 20s and 30s today will grow to become leaders tomorrow. So far, western companies and investors have provided most of the training, but, increasingly, the growing tip of the iceberg—successful Chinese executives and entrepreneurs in China and abroad—have begun to set examples and invest both their time and financial resources in teaching and fostering leadership. One can imagine a future where inexpensive products will no longer be the only Chinese export, but Chinese leaders will become teachers and investors in other parts of the world.
Bo Shao, Young Global Leader of the World Economic Forum, is chairman of Novamed Pharmaceuticals, People’s Republic of China. Comments are welcome at email@example.com