The Second-generation Rich in China:Besting Mum and Dad

I feel so proud of my son C many children of self-made men like me are not capable of taking over family businesses,” enthuses Chen Gentu, board chairman of the Zhejiang-based Shunpu Hats Industry Co., Ltd. This grey-haired man glows with pride when talking about his son Chen Junbiao.

Chen Junbiao is part of the generation whose parents were among the first private entrepreneurs to emerge after the reform and opening-up drive was introduced. They have become known as the second-generation rich in china. Most of them were born in the 1980s and will inherit over RMB 100 million from their families. Hurun (Rupert Hoogewerf), the British founder of the Hurun Report, once said: “Family business succession is typical in places such as Zhejiang, Guangdong and Fujian provinces, because those entrepreneurs initiated their businesses at an earlier stage, have accumulated wealth for a longer time, and have childrenmore likely to take over the family business earlier.”

“A successful handover needs a process,” says Chen Ling, head of the Family Firm Institute of Zhejiang University City College. This has become a general problem for Asian family enterprises. “As with many emerging economies, China lacks a modern wealth succession model,” Chen adds.

Paying Their Dues,

Leaving Their Mark

Chen Junbiao entered his family firm upon graduation from university. In the beginning, his father encouraged him to assume a non-management role, working in a paper mill affiliated with the company for a year to learn the most basic techniques. Chen Junbiao was allowed to step into a leadership position only after he gained experiences as a worker and technician.

When it comes to business operations, Chen Junbiao holds different opinions from his father. Like his dad he favors exploring business niches by attending exhibitions, but he also stresses the introduction of modern management concepts. Although the global economic downturn affected the company’s exports to a certain extent, the firm minimized the effects by utilizing a B2B (business to business) model which enables high volume order processing through e-commerce websites like Alibaba () and Made-in-China (). Chen Junbiao also says that he pays more attention to details when dealing with clients. For example, he designs his own business cards using a unique style which deeply impresses clients, while his father’s still uses a plain, traditional look.

The junior Chen also maintains a different attitude toward life. He says: “My father devotes himself to the business almost all the time, but I work to squeeze in one day per week for my family. We organize family tours every year to make sure we enjoy our lives.”

“It is not only a family business, it touches the lives of many families. The company is a platform for every employee to show their creativity and talent,” claims Chen Junbiao. He hopes that if one day he leaves, there will still be non-family members to take care of the company. Many second-generation rich like him don’t want to live in the shadow of their parents, he believes. Most of them attempt to start new businesses, but even their start-up funds are a family gift.

Chen Gentu says: “I plan to retire in two or three years, because I am confident that my son and daughter can handle the business well. I started to delegate powers to them last year, and in 1998 they began to oversee production and marketing functions. I have barely concerned myself with the company’s affairs since 2001.” Talking about his company’s future, Chen Gentu says that business development mainly relies on the ongoing presence of talented people. There are no other kin in the company’s management group besides his son and daughter. He says that even if his relatives wanted to join the company he would evaluate their talents first.

As to the competitive instincts of the second-generation rich, Chen Ling ispositive: “Excellent entrepreneurs are likely to emerge in families which run their own businesses. Many factors, including the family’s tradition of doing business, education, and even the parents’ genes, will be conducive to cultivating the children’s business abilities. Along with wealth succession, management skills have also been passed on to the next generation.” Chen Ling’s outlook is that these children will probably run the companies better than their parents, as long as the enterprise is in a relatively agreeable environment without vicious market competition.

More Experience Needed

In 2007, 26-year-old Yang Huiyan was handed 70 percent of the shares of Country Garden Holdings from her father and became China’s richest person, with a fortune of US $16 billion. This wealth also put her at the top of both the Forbes Chinese Mainland’s Rich List and the Hurun China Rich List that year.

However, over the last two years, under an economic recession and a housing market downturn, Country Garden has reported large losses tied to failed investments in financial derivatives. Its share price plunged from a high of HK $14 in October 2007 to a low of around HK $1 in October 2008. Based on market value, Yang’s wealth hit HK $130 billion in the bull market, and shrank to less than HK $10 billion in the bear market.Within one year her wealth shrank by over 90 percent.

The financial crisis poses great challenges to the second-generation rich. The parents started and developed their businesses before China’s entry to the WTO, but their heirs now face a completely different environment. “Most Chinese private enterprises are engaged in industries with very low concentration rates. This situation results in the adoption of short-term competition strategies unfavorable to the development of the Chinese market and long-term competition. Therefore, only by adapting to the current market competition rules can young successors better utilize their companies’ advantages,” says Zhao Min, founder of Beijing-based Adfaith Management Consulting Inc. To ride out the financial crisis, these young successors, besides relying on their own strengths, should engage the collective wisdom of their companies.

Ma Jinlong, president of the Wenzhou Economic Society and a professor at the City College of Wenzhou University, is an expert on Wenzhou private enterprises. From his point of view, the second-generation rich grew up in a time of plenty, so they do not face the same subsistence pressures as their parents. But they have to put on their game face when it comes to asserting their value amid cutthroat market conditions.

The 27-year-old Zhao Zikan is CEO and founder of Shijiazhuang Cutech Technology Inc. As part of the post-1980 generation, he has many second-generation rich friends. He thinks the affluent heirs are bothered by two factors. The first is the pressure they are under after taking over the family firm. Many of them have overseas study experience and their parents arrange for them to take over management positions after graduation. But they find it hard to take over the work in a short time, because they are not familiar with production at all. The second factor they often complain about is the huge gap between the education they receive in foreign countries and domestic expectations, which makes it hard for them to adapt to local operating models.

In order to help these young successors better cope with the financial crisis, Zhao Min suggests their parents learn from Li Ka-shing, and arrange for more experienced staff to serve as mentors for the children. “I believe it is a good way to help them tackle the crisis and to smooth the company’s transition to better days,” says Zhao Min.

Not the Only Choice

Chen Ling conducted an investigation targeting private enterprises in eight cities and counties in Zhejiang Province, finding that two-thirds of312 enterprises reviewed were family firms. Hurun once estimated: “The average age of people on the Hurun Rich List is 46. According to Chinese tradition, retirement should be at 60. Therefore in the coming 10 to 20 years the wealth transfer from the first to the second generation will reach its peak in China.”

Zheng Chen’ai, president of Zhe-jiang Aobenni Garments Co., Ltd., has only one daughter, but he has never intentionally groomed her to take over his business. “The younger generation wants to engage in fashionable industries, such as IT or art,” he says. His daughter is doing advertisement design. He thinks a lot of children don’t like taking over the family firm because many enterprises are at the low end of the industrial chain. For example, in Wenzhou, the majority of family firms are engaged in processing industries involvinghat, garment or shoe manufacture. However, most children have received a good education and are capable of handling high-end businesses. “The interests of the children will ultimately decide the success of family firm succession. Most entrepreneurs in Wenzhou would like their children to do what they want to do,” says Zheng Chen’ai.

There is an old Chinese proverb, “Wealth will not survive three generations,” in the sense that the first generation works hard to earn family wealth,the second generation maintains it, and the third generation squanders it. Figures indicate on average a family firm lasts 24 years, coincidentally equal to the length of service of most business pioneers. About 30 percent of family firms succeed in the second generation and less than two-thirds make it to the third generation. In the rags-to-riches- to-rags cycle, about 13 percent make it to the fourth generation.

But more important than the succession of wealth is the succession of entrepreneurial spirit and the succession of social responsibility and philanthropy. On February 19, 2009, people were gratified to hear Cao Dewang, board chairman of the Fujian-based Fuyao Glass Industry Group, announced he was using a 70 percent stake in the company, estimated to be worth RMB 4.3 billion, to set up a charity foundation. The associated profits will be directed to education, poverty elimination, disaster relief, religious affairs and so on.