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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.

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Do you think the family business model has a future in China?

I think family business is a key component of China’s economy. One of the main reasons is that family businesses are fast decision-makers. There is hope that they will quickly adapt to the changing environment.

Many family businesses are now dealing with the next generation and key decisions have to be made regarding the future. The first generations naturally want to maintain reign. There isn’t necessarily a culture of outside delegation, which may lead to a lot of private investment offices popping up to keep control. At the moment, corporate and family wealth are intermingled. The financial office of the company also manages private wealth, which is not a good idea. Families have to work on separating the corporate from the private wealth, which is already beginning to happen since families are discovering the exposed risks.

We cannot ignore the influence of upbringing and context when it comes to the structuring and preservation of wealth. It is very important that we develop solutions tailored to the specific challenges and culture of Chinese family businesses.

SPOTLIGHT: The Family Businesses of China - The Old and the New
Image courtesy of David Chang

What Chinese family businesses have successfully internationalised and how?

There are the big names like Wanda Group and Alibaba. But that doesn’t mean smaller players aren’t also successful.

Businesses that have entered technology, healthcare, environmental cleanup and education markets will likely see the greatest rate of expansion in the coming years. We need global technology that is adapted to local vision. In the past thirty years we have also created a lot of pollution and do not know how to clean it up. We urgently need to address this problem for the sake of future generations.

What kind of jobs will be required in the future?

I can’t base these predictions on actual numbers, but we will definitely need programmers and e-commerce experts. At the moment these are hard to come by. The challenge is to steer fresh graduates towards these specialisations.

What is your hope for the future of Chinese family businesses?

Obviously, the medium to long-term opportunity in China is tremendous. Local businesses have the local knowledge base to quickly access these opportunities. We have to pool global resources together. International capital can help to change the game so family business will have to team up with other players. The future lies in global partnership!

Tharawat Magazine, Issue 28, 2015