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Interview with David Chang Co-Founding Partner, G9 China Private Office Secretary General, China Family Office Association

China’s exponential economic growth in the past decades is rooted in an incredibly ambitious and active private sector. As of 2014, 12.5 million private businesses exist and employ over 125 million people, galvanising growth in China. Most of these businesses are family-owned.

The incredible wealth created by Chinese family companies in manufacturing, real estate and trade, must now be structured and repurposed towards the next big economic frontiers: education, healthcare, environmental cleanup and high technology.

David Chang moved to China in 2007, after years of working in wealth management in the United States. He soon understood that family businesses needed more than just wealth management. They needed a community where they could exchange experiences, pool resources together locally and globally and find education and training solutions for the next generation. Chang set up the G9 China Private Office (part of G9 Private Office global network) and China Family Office Association to provide family office solutions.

Tharawat sat down with David Chang and discovered what challenges Chinese family businesses face, where future growth will come from and why it is important to team up with the right partners.

How are family businesses structured in China?

Until a few decades ago, we had a party economy driven by state-owned enterprises. The state-owned enterprises received preferential treatment but then stopped innovating, becoming slower and less productive. We now have over 10 million small to medium enterprises (SMEs) that generate most of China’s jobs and real growth. Thirty years ago there was no such thing. The future of our country lies with the Chinese private sector and, therefore, with family firms.

After decades of reform we are now at the stage where the first generation is handing over to the second, 90% of whom are in their 20s and 30s. Traditional family businesses are facing typical obstacles like succession, governance and the challenges of moving into new business sectors for the very first time. Needless to say, it is a critical phase.

Do Chinese family businesses generally keep ownership within the family?

Traditionally, Asian families focus on keeping the business within the bloodline. Because of this mentality, they never consider outsiders or non-family employees as future owners, leading to a lack of motivation on the employees’ side. Anyone with good skills will never join a company in which they have no future. The thing is, we need skilled employees because business models have changed.

The first generation focused on export, construction, manufacturing and real estate development. Going forward, there will be no more local government guarantees and we will have to focus on clean technology, education and healthcare.

What the first generation had in terms of resources and networks, no longer works. Chinese family businesses have recognised that the future is globalised and connected.

The next chapter will be difficult to define for the upcoming generation. Their parents built a successful business and now want them to take over. They have money but they don’t know how to take the business forward. It is important that the next generation have a good education, but they also need business support.

What industries have the strongest concentration of family firms in China?

Around 75% of wealth is from real estate, construction, manufacturing and trade.

Wealth structures are interesting in China. We now have old money from traditional textile, trade, manufacturing and real estate industries, and new money from e-commerce, healthcare and tech. The new wealth was generated about five to seven years ago and is growing fast. Today the richest people in China are not the same as they were ten years ago.

The upcoming opportunities in China are in education, healthcare, environmental cleanup, clean technology. Businesses want to capitalise on these opportunities. In the past, everything was focused on providing a low cost point. Going forward, China will heavily invest in high-tech, which will require outside acquisition. The emphasis used to be on copying strategies, now China wants to transition into a knowledge-based economy.

What are the main challenges and opportunities facing Chinese family businesses?

I think the opportunities are tremendous. At the moment, China has no Plan B. Our health care system is broken. Our education system is broken. We urgently need clean technology. The problem is the knowledge gap in these areas. Today you are in a very good position if you have capital because you can acquire knowledge. But to make good value out of an acquisition requires another set of skills. A lot of help and education are needed.

The old business model is no longer working. It has excess capacity. The size of demand is changing and we do not have the time to make the necessary changes. Traditional businesses are dying month by month. If companies do not adapt their business models to the new types of demand, they will also die.