Wu Jia Yuan is typical of China’s older generation of home-grown private entrepreneurs. Having started from the bottom of the ladder at Hubei Dengfeng Heat Exchanger to eventually become chairman of its board, his international business career couldn’t be more different than his childhood during the 1960s spent in rural Da Ye, in the central province of Hubei. Hardship back then was no stranger and had a profound effect on the senior executive. “I am a simpler man than most,” he says. “I grew up in a rural area, and even from an early age, life was never easy. Today, I treasure every stage of development in my life.”
His business life certainly mirrors that of many entrepreneurs in China who have been ready and waiting for every move to open up the country’s economy to Western practices and partners. When waves of privatization and management buy-outs swept through China in the late 1990s, Wu, like many others, was caught up in the drive to modernize. “1998 was a turning point in my life,” he says. “I was head of the factory, but I hadn’t gotten there by kissing the ass of local authorities. I was considering leaving Dengfeng that year after a friend offered me a job with his company in Shenzhen with an annual salary of RMB 600,000 (US$88,000), 10% dividends, and a housing and car allowance. I almost left. But the then-secretary of the county CPC [Communist Party of China] inspired me to buy out Dengfeng and convinced me to stay. Eventually, I bought 60% of Dengfeng’s shares.”
Over the next 10 years, Dengfeng became the country’s largest heat exchanger company by market share, supplying a range of customers, from auto makers to textile companies to medical instrument suppliers. It also began entering into joint ventures (JVs) with foreign partners, including one in 2003 with cooling equipment maker Chevon International Corporation of Singapore and another with Unifin of Canada to supply products to power utilities in 2005. Today, the company, with annual revenue of around RMB 500 million ($73 million) has a workforce of 1,200 employees.
In the midst of the financial crisis last year, a U.S. multinational and Dengfeng began discussions about a new JV. “The financial crisis was a big test for me,” says Wu. “It was also an opportunity to watch and learn. I wondered why — in the middle of a serious worldwide economic crisis — would a company from U.S. be willing to invest in us. I realized that it was because we run an honest and disciplined operation.”
In an interview with China Knowledge at Wharton, Wu shares his thoughts about corporate governance, information management, the conflicts that arise between Chinese and Western businesses, and the key to entrepreneurial success in an emerging market economy. As he asserts, “Companies and wealth ultimately belong to the society of which they are a part.”
The following are edited extracts of the interview.
China Knowledge at Wharton: Some observers say China’s private enterprises are struggling. What are your thoughts?
Wu Jia Yuan: There is some talk about China’s economy growing to be the largest in the world in 20 years, but I don’t think achieving this is the most important thing at the moment. What is really important now is establishing a healthy, stable economic system and social order. We often hear about asset price inflation. Why is this? Because many manufacturing companies are investing their money in the stock market or property market, which means the manufacturing parts of their businesses are struggling.
China Knowledge at Wharton: What are the main factors contributing to the situation that many of China’s private companies find themselves in today?
Wu: My view is approximately 70% of the responsibility lies with the owners of the private companies and 30% with societal factors, such as the allocation of resources, inequality in social status, and inability to hire effective resources and talent in the face of competition from state-owned enterprises. One of the biggest challenges impeding the growth of private companies in China is finding top talent. There is a traditional mindset in China that good students become government officials, and this has played a role in shaping people’s career goals. You can see the impact of this mindset in the number of people registering for the civil servant examinations each year.
But issues of talent aside, social elements also have a profound effect. Some private companies owe their success to hard work and dedication, but others have become overnight successes through sketchy shortcuts and bribing corrupt officials. Because China’s market is not mature yet, an increasing number of people choose to succeed through bribery or other illegal means.
China Knowledge at Wharton: What are some of the problems with the owners of private companies that you’ve just mentioned?
Wu: China has a long history and a splendid culture, but the market economy is a completely imported concept. We know very little about how to develop a business and compete in a market economy. Furthermore, impatience is widespread in China, and if manifested in company management, it leads to a host of issues and potential crises [affecting] a company’s growth and survival.
China Knowledge at Wharton: How do you view corporate management in general?
Wu: When my friends and I discuss management, we usually use three analogies to describe the different mindsets of owners of private companies. Some view the company as you would a wife — as totally private and no one else can touch. Some see the company as a son, to be nurtured for longevity. Finally, some see it as an asset similar to a pig, and look for ways to increase its value. I lean most toward the third view. The relationship between you and the company is not the most important consideration.
In terms of the management of private companies, there are four main aspects. First is the design of a management structure, which is well regulated, [rigorously] designed and developed with a long-term horizon in mind. Second is finding ways to use the entrepreneur’s skills in developing this structure.
These two aspects will be very difficult to address for those who look at a company as a wife or son. They won’t trust outsiders and will be unwilling to develop transparency in the company. A transparent management system is key to a successful company, and achieving this involves a systematic effort to organize employees and the management team.
Third, you need to build relevant managerial processes, introduce standardization and have symmetrical information. Fourth is the application of management tools, such as an [ERP, or enterprise resource planning] software system — but the problem is only about 5% of Chinese companies that have adopted an ERP system use it for their day-to-day operations.
For most Chinese entrepreneurs, balancing the relationship between management and power is the biggest challenge. The traditional Chinese mindset sees power as the most important thing to achieve. For thousands of years, China has had a culture of power. However, I don’t see management as power. Management is a capability, a skill. You can’t manage a company well just through gaining a lot of power. It has to be a combination of the four aspects I mentioned.
China Knowledge at Wharton: You employ professional managers trained at business schools to run your joint ventures. How do you handle the “agency conflicts” between shareholders and management? And how do you communicate with your managers?
Wu: As mentioned, an effective management system is a crucial foundation for managers to run a company. Then you need to focus on reaching beyond yourself. According to traditional Chinese wisdom, when one has reached a certain level of wealth and a certain stage of life, one has to learn to reach beyond oneself, or one’s ego, to see oneself and one’s actions from an objective viewpoint. On the other hand, are your able to run your company as effectively as your manager? In my view, hiring professional managers is the only way to help your business flourish. At present, China’s business environment is not good enough for managers to develop their capabilities.
After establishing a management system, you need to focus on building a fully transparent communications system between you and your management team. You might trust them, but actions speak louder than words. Your managers may be worried that you will go back on your word. In recent years, I have thought a lot about this issue. I communicate with my managers in writing, and in a transparent way … so that other parties can see exactly how and what decisions have transpired.
There is indeed conflict between owners and managers. Owners are more concerned about the company’s future and tend to focus more on long-term development. Managers are more focused on the present. They are involved in the day-to-day realities and responsibilities of the job. They are more focused on reaching short-term targets.
For example, some American companies build their factories in China with rented computers and furniture as a way of keeping costs and risks low. This might work well for them, but a Chinese owner might not want to run his operations this way. But if companies lack a clear, long-term strategy, they will have a difficult time developing further.
China Knowledge at Wharton: How do you see the internationalization of Chinese companies and the integration of, or conflict between, Chinese and Western cultures?
Wu: If you want your company to grow bigger and stronger, you have to internationalize. First, you have to establish strong company values; second, you have to be involved in a global market or be in competition with global players; and third, you have to manage your company according to international rules.
Culturally, Western philosophy is based on objective principles. Chinese philosophy is based on humanistic principles, on the self. Personal elements and characteristics play a very strong role. China’s economy incorporates both regulation and emotion. At present, we must integrate the two. In the meantime, as China’s private enterprises expand, entrepreneurs need to learn to shed their egos. The wealth they have created will be absorbed ultimately by the whole of society.
China Knowledge at Wharton: How do you view wealth?
Wu: ChiNext [the stock exchange for start-up and small companies in Shenzhen] was launched last October, and many people came to me with estimates of how many times over my assets could grow [if we listed on it]. I don’t think these numbers are very important. I grew up in a rural area, and even from an early age, life was never easy. Today, I treasure every stage of my life that I’ve been through. One’s mindset is important. It impacts the way you think; whether you are calm or impatient, whether you care more about short- or long-term interests, and how you look at risk. In 2007, I was in a car accident, and this has also shaped my views on what is important in life.
I concentrate more on how to lead this company into a promising future. Assets, numbers, records, rankings — they don’t really matter that much to me. Some people may risk using bribes to win a million-dollar bid, but in doing so they have harmed the whole of society. If you view the whole of society as being similar to a human being, then it’s easier to see how one bad habit or influence damages the whole. You might be able to lift heavy things if your arms are strong or run quickly if your legs are strong, but if you are only strong in one area, your body as a whole is out of balance and cannot last long.
China Knowledge at Wharton: What do you think of executive MBA education in China?
Wu: Most EMBA training is a way to make money. Form outweighs content. Those running management-training programs need to find better ways to train people. For example, designing training courses targeted at specific individuals or, more generally, tailoring courses to student demand. Before any training begins, they could use evaluation tools to identify a person’s strengths and weaknesses, and use this information to devise a course suited to the person. This kind of training would be much more effective. Group classes tend to lose focus.
China Knowledge at Wharton: Have you thought much about who will be your successor at the firm? Will it be your children?
Wu: It mainly depends on what my children wish to do. My goals are for them to be healthy, be independent and find happiness in whatever they choose to do. My eldest son graduated from university last year and now wo