China faces family business succession crisis

China has a problem with family businesses: a sizeable number are preparing to hand over control to the next generation. However — in a development that some say will hurt and others think might help the world’s second-biggest economy — some may not stay in business at all.

More than half of the children of the wave of entrepreneurs that built China’s export economy after former leader Deng Xiaoping opened the Communist nation to free market capitalism in 1979 do not want to succeed their parents as bosses of their family firms, surveys and academic studies suggest. Instead, they would rather work for themselves or in fashionable industries such as banking, investment and technology.

“What China is facing is a big social and economic loss,” says Joseph Fan, co-director of the centre for economics and finance at the Chinese University of Hong Kong. “A lot of productive business will stop,” adds Prof Fan who estimates that founder-run businesses contribute over half of China’s GDP, with much of the rest of the economy comprised of state-owned enterprises.

Observers of the trend pin the cause on factors from the individualism of Chinese millennials to the fact their business-owning parents have worked so hard to succeed in a business they neglected to involve their children in their companies. Children of entrepreneurs who sent them to school or university in the West can also return home inspired to start their own venture that is based on experiences they had abroad.

“In my expert opinion, it is more than six in 10 children of business owners who are unwilling to take on the family business,” says Prof Fan, who says he speaks to more than 100 Chinese entrepreneurs each month for his academic research and in his practice consulting business founders on succession planning.

Professor Jean Lee, co-director of the Centre for Family Heritage at the Shanghai-based Ceibs, China’s top-ranked business school, cites three widescale research projects on family business succession that have been carried out by Chinese universities since 2011, which show that less than half of the would-be second generation of family business leaders are willing to take up the reins.

“China’s family business sector has lacked that culture of raising and educating the children in the ways of the family business and the family business culture,” says Prof Lee. She explains that busy entrepreneurs “do not groom their children to take over”. Many are “raised by grandparents and then they are often sent to the west for boarding school and university”, she adds. “The bonding with the family is not very strong, and those who return to China come back full of new ideas and aware of other career options.”

Li Xin, a 26-year-old who earned his masters degree from Warwick University in Britain last year and has returned to mainland China, is a prime example of this trend.

Mr Li says his father, who is now 58, has run a successful construction business since 1997. But the younger man, who like most other Chinese people his age does not have any siblings, says he has no intention of stepping into his father’s shoes. Instead, he is starting his own business in Suzhou, an affluent city about 100 kilometres north-west of Shanghai, which will teach personal trainers popular Western exercise disciplines such as CrossFit, catering to China’s burgeoning new market for health and fitness. “I guess it was my experience studying in Britain that inspired me to do this,” he says of his start-up company, which he has called Flex New Body Culture. “Also I travelled to the US in 2015 to see what was going on in the fitness industry, as I had an idea by then that I wanted to do this.”

Of his father’s company, Mr Li says: “Maybe I will take some responsibility to run his business as well [as my own]. But I hope not. I hope he finds an adequate buyer or another CEO so he can just retire.”

Yang Liu, the mainland Chinese-born founder of men’s apparel company JoeyWears and a director of global female entrepreneurs’ association SheWorx, says many young Chinese business founders in her network were also born into family businesses that they now choose not to work for.

“When the family has money the kids have a lot of options,” she explains. “They get educated abroad and then they can choose what to do next. The family business does not really excite them when they can start their own company or invest in other start-ups.”

What China needs now is companies that can help people construct not better buildings, but better bodies. So I want to solve this new problem

Yet Clinton Dines, a veteran natural resources executive who arrived in China from his native Australia in 1979 and was China head of global mining group BHP Billiton until 2009, says this trend is not necessarily the making of an economic crisis. Mr Dines, who observed China’s development from its first free markets, “which were basically farmers selling a few straggly carrots” to the more recent tech boom that gave rise to global giants Alibaba and Tencent, says “these kids of company founders could well be making good decisions.

China, he points out, has a vast amount of industrial overcapacity in “sunset industries” such as steel making, shipbuilding and low-skilled manufacturing.

“There’s a relativity to it, “ he says. “If it’s a big and very successful family business there is a compelling reason for the family to keep it. But when the kids get some affluence they go to America and get their degree and they’re not that interested in the widget factory, perhaps they’ll go on to do something better.”

This attitude, says the gym founder Mr Li, is one he holds wholeheartedly. “China is changing,” he says. “When my dad started out perhaps China did not have enough buildings, so we needed companies to construct them. But now we have different problems such as obesity and chronic diseases like diabetes. What China needs now is companies that can help people construct not better buildings, but better bodies. So I want to solve this new problem.”