Problems that transcend the generations

Updated: 2015-09-25 08:01

By Cecily Liu(China Daily Europe)

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Family companies sometimes have a mismatch of ideas and trust issues with Western advisers

While the difficulties of Chinese family business succession are usually blamed on differences between first generation entrepreneurs and their children, there is another mismatch that is also important.

A huge gap often exists between these businesses and many of the family offices lining up to advise them, says David Chang, secretary-general of the China Family Office Association, based in Shanghai.

Europe's family offices, as the advisers are known, often see their potential clients in China as needing guidance primarily on succession, wealth management and overseas investment choices. But what they really need goes far deeper than that, says Chang, who is also a managing partner at his own company, Elite Family Office China, which has offices in Shanghai, Beijing, Shenzhen, Hong Kong, London and New York.

Instead, one of the fundamental problems facing many of China's family businesses is a need to transform their business model from manufacturing intensive to high-tech, and from domestic driven to internationally focused.

"China is reaching a point where the first-generation entrepreneurs who grew their businesses to massive scale, beyond their imagination, over the past three decades are losing their grip on the country's new economic situation," Chang says.

"They have become rich through a resource-intensive model, meaning they may have had some connections or opportunities to control a big share of the country's resources, which led to their success. But nowadays wealth is created through technology, innovation and professional skills, which can more conveniently be found in international markets, and this forces them to internationalize."

From a macroeconomic perspective, previous stars of the Chinese economy like manufacturing, commodities extraction, export industries and real estate development are giving way to advanced engineering, healthcare, financial services and green technology.

Because these industries have grown more quickly in Western markets, the real solution for Chinese family businesses should be to buy overseas niche-sector technology and incorporate it into their traditional supply chain and manufacturing capabilities.

However, this challenge is not fully appreciated by many of Europe's family offices, which believe their experience in helping century-old family firms in Europe can be directly replicated to help their Chinese clients. Nor is it fully understood by many family offices in China, which did not begin to emerge until around 2013, making them as a group less experienced, despite a rapid growth in numbers.

Chang, a key organizer of the Financial Times Family Office Forum in Shanghai, recently rescheduled from Sept 16 to Nov 16, says these problems will be raised at the forum. The event is expected to draw about 50 family businesses from Europe and an additional 150-200 from China.

The forum, founded in 2012, has become a highly regarded network for family businesses to exchange ideas and work together, and this will be the first time for it to be held in China.

"One big problem of this mismatch in understanding is that many Chinese family businesses do not trust the European family office advisers enough to tell them all of their personal information, which is a rather essential factor in wealth management, as this is a highly skilled, tailored solution at the core of family offices' work," Chang says.

This difficulty arises because family businesses in Europe have been working for centuries with their advisers, so they have built mutual trust over the years, but such trust is not so easily achieved with Chinese businesses that are new clients.

As a result, when they are unable to provide all-encompassing wealth planning services, European family offices end up providing overseas property hunting services for their Chinese clients, and help their clients' children enroll in good schools in Europe.

"These services are all very limiting, and are far from the 360 degree services typically provided to their European clients," Chang says.

In order to reduce this gap in understanding, Chang's team, in connection with G9, a family office think tank and private capital network, has proposed a new model. It involves working closely with second-generation Chinese entrepreneurs, helping them to identify the exact problems their businesses face and advise them in finding a career path that will help them and their family businesses.

"It is important to recognize that the children of family businesses don't always need to continue with their parents' businesses, and there are many ways to create continuity for their family firms," he says.

Western markets have proven that not all children who inherit family businesses have found success, he says. In the United States, for example, the average success rate of passing a business to the second generation is 60 percent, 30 percent for the third generation and 5 percent for the fourth generation, so successful examples of century-old family firms are hard to find, he says.

In addition to taking over the family firm, the second-generation entrepreneurs can also cash in on their family business and use the additional money for investments with higher returns, such as property and private equity. They can also start their own businesses in industries that are more favored by China's current economy, while taking heed of some of their parents' advice and financial backing, Chang says.

Problems that transcend the generations

(China Daily European Weekly 09/25/2015 page15)