ViewPoint: 4 challenges for Chinese family businesses

Shanghai - dominated by family firms. Photo by Scott Sporleder/Hemera / Getty Images

Shanghai - dominated by family firms. Photo by Scott Sporleder/Hemera / Getty Images

Millions of businesses that started in China after the economy opened up 30 years ago are still run by their founders, who are looking to pass their companies on to the second generation. But China has several unique characteristics that make this tricky. Here are four challenges facing Chinese family businesses.

1: Succession. The one-child policy means that succession in China is even more complex than it is elsewhere. Almost every family business owner under the age of 50 has only one possible heir.

Many people are very keen on the traditional model of a son taking over the father’s business, but because Chinese fathers are typically autocratic with their sons, there can be a lot of conflict unless the sons are also very traditional.

Older parents also grew up in a very different world to their children, and even more so if the children were educated overseas and have absorbed Western values.

There tends to be less conflict with daughters - fathers like to treat the princess well, and tend to be more nurturing, more communicative, better at mentoring, and more tolerant. But then problems can arise with the sons-in-law, who have to suppress their ego a bit, and show some sensitivity to the family’s needs. These problems are not insurmountable, but they add an extra dimension of difficulty to succession.

2: Professionalisation. In most family businesses if the heir can’t or doesn’t want to take over then the family might turn to professional managers. But in China this poses problems. For a start the culture of guanxi - where “insiders” are preferred to “outsiders” - means patriarchs find it hard to trust managers. Also, there are simply not enough good managers, and they tend to be more attracted to large corporates, rather than family-owned businesses which tend to be smaller and perceived as less prestigious.

A further problem is that most founders, especially the over-50s, have never worked in big companies and don’t really know what professionalisation means; it is not in their frame of reference. This is something that the second-generation can help with, especially if they have worked overseas and can bring back the Western approach.

3: The internet. Many of China’s family businesses started 20 or 30 years ago, and most in low value-added industries. The internet era poses a big opportunity to them. Again, the second generation can be very helpful here and many start internet arms of the parent company. For example, I know one woman whose family company is in the garment industry, and she started to offer an online service where you can send in your measurements and choose fabrics and they will make clothes for you. She has helped her father find a whole new business model that he never would have.

4: Internationalisation. Many Chinese family businesses would like to go outside China, but they are pretty slow to make that move because they are usually very conservative, and also there are language barriers. This is another area where the second generation can help. An example is Wahaha, the country’s biggest soft drinks maker. The father doesn’t speak a single word of English, but his daughter - who does - helped to plan an internationalisation strategy. They are moving very slowly, but they are moving. The second generation is slowly discovering that they don’t have to do things their father’s way.

Professor Jean Lee is co-Director of the Centre for Family Heritage at the China Europe International Business School (CEIBS), which will host the 4th China Family Heritage Forum in Shanghai on July 11.