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Are China’s 2Rich Ready to Take Over Family Businesses?

Volume 2, 2014

Prof Seung Ho "Sam" Park

By Shaomin Li and Seung Ho “Sam” Park

China started its economic reform in the late 1970s, after Mao Zedong’s death, when the country was on the verge of a total collapse.  A few decades later it has produced a class of successful entrepreneurs whose wealth rivals the old monies of the West.

Their success has created a novel phenomenon in China: “fu-er-dai” or “2Rich” –  the second generation of the rich. While their parents’ hard work earned them money, and thus respect in the society, the 2Rich have a reputation of spending lavishly and driving expensive sports cars.

While mature economies go through a slow transfer of wealth over multiple generations, wealthy first-generation entrepreneurs and their descendants are entirely new in fast-growing emerging economies like China. These entrepreneurs are now in their 50s and 60s and are beginning to assess the option of retirement, which includes looking at leadership succession in their family-run businesses. Will they hand the reigns over to professional managers from outside the family, or to their children? Would the 2Rich be willing and ready to continue the family tradition?

CEIBS Knowledge, Volume 2, 2014

In 2013 we launched a multi-year research project and have completed a group of face-to-face interviews with China’s 2Rich to shed light on this important subject. Here are some key findings so far:-

First, there is an overwhelming trend that the succession plan works within the family. None of the founders expressed the desire to open up control to professional managers from outside. It is very likely Chinese family businesses will remain closed within the family and the 2Rich will succeed first-generation entrepreneurs. 

This leads to our next questions: Do the 2Rich have the desire to take over their family businesses? If they do, are they then ready to step into their parents’ shoes? To answer these questions, we looked at their educational backgrounds, attitudes, and experiences.

The 2Rich are highly educated with majors in relevant business fields such as economics, management, and finance. All the 2Rich interviewed are college educated and many have Master’s or higher degrees. Nearly half studied abroad, mostly in the U.S. It appears they are well trained to lead their family businesses. 

So, with such a high level of education in modern business disciplines, can the 2Rich succeed in assuming the CEO role of the firm their parents created?  While our study cannot directly answer that question, there are some tell-tale signs that guide our thoughts on the situation.

When we asked the 2Rich about the reasons they would take on the role of successor, 80 percent said it was because of their parents’ poor health and lack of energy and only 20 percent said it was because their parents think they are ready and mature.  Most consider a ‘lack of experience’ a major challenge in being a successor.

At the same time, our study shows that the 2Rich are eager to make changes in the family business. Nearly all (97 percent) of them who already work in the family business think that the business needs to be changed. As to the kind of change, 59 percent want to make ‘revolutionary changes’.

CEIBS Knowledge, Volume 2, 2014

We also detect some unwil-lingness to take over the family business. A considerable proportion of the 2Rich, at least two out of ten, chose to start their own businesses and these were mostly in different areas so they could ‘prove themselves.’  In addition to this need to ‘prove themselves,’ another dominant reason they gave for not wanting to go into the family business was that it ‘is too old fashioned’.

Mr Hu, a successful founding entrepreneur we interviewed, commented, “Our kids do not want to toil in the field like us. What we did is too hard! They want us to give them the money, so that they can sit on a private equity fund and dole out investment to others who do the hard work for them.”

So, what can we derive from these findings?

In the next decade we will see many first-generation entrepreneurs retire and new leaders take over family businesses. The legal environment is still too weak in China to offer effective protection for passive investors. Naturally, the founding entrepreneurs are reluctant to hand over their companies’ management to professional managers from outside the family circle. They liken the professional manager to the ‘big bad wolf’ wearing granny’s clothing in the children’s tale of Red Riding Hood. “Once you hand over the child to the ‘granny,’ she will eat the child,” said one entrepreneur.

What we see here is quite worrisome for the future of the private sector in China: The professionalisation of family businesses is unlikely in the near future. The 2Rich are inexperienced and not ready to take over the family business. The fact that most of them do not have siblings due to China’s one-child policy may limit the candidate pool within the family.

Yet, most 2Rich are very ambitious and want to make fundamental changes to the way their parents run the family business. Given the combination of the over-confidence that comes from their business education and their lack of experience, they will inevitably make many mistakes. Wang Yung Ching, the late legendary founder of the Formosa Group, cautioned, “The worst thing for a successful entrepreneur is to ask his son with an American MBA to take over his business.”

CEIBS Knowledge, Volume 2, 2014

On a positive note: assuming these ideas would work, the 2Rich will bring in new ideas and take China’s private sector to the next level. Also, the lack of siblings will reduce family infighting and increase the chances of a smooth transition, potentially leading to effective management during the post-succession period. 

Finally, an after-thought that is closely related: perhaps the biggest shortcoming of business school education is its inability to mould successful entrepreneurs. Business schools can teach theories and techniques about management, marketing, or information technology, but cannot inject the mentality, the toughness, and the ups and downs of being an entrepreneur. According to Mr Hu, the gut feeling, toughness, and foresight a successful entrepreneur must have in order to make hard choices can only come from “figuring out where employees’ next pay check will come from when the cash flow is negative”.

Shaomin Li and Seung Ho “Sam” Park are professors at Old Dominion University and China Europe International Business School, respectively. This article first appeared in the Feb 27 issue of the Financial Times.