In September, Gary Locke, former U.S. Ambassador to China, Secretary of Commerce and two-term Governor of the State of Washington, returned to Davis Wright Tremaine as a Senior Advisor.
Ambassador Locke’s return sparked a question among our attorneys about family business in China and how it compares to family business operations in the United States.
Family Business Growth
According to a recent article in the Asialinks Essays, there are between seven and eight million private enterprises in China, and family businesses account for more than eighty percent of those. This means there are nearly six million family businesses in China – substantially more than in the U.S. Not only are there a lot of them, they are experiencing more growth overall.
In a 2014 survey of 2,378 family businesses across 40 countries conducted by PwC, a global professional services provider, among the respondents from China, 84 percent report growth over the past 12 months, compared to the global figure of 65 percent. Furthermore, optimism for the future is high with 53 percent aiming for quick and aggressive growth over the next five years.
The survey data goes on to show that 53 percent of family-owned businesses in China plan to float additional shares of their stock or sell their businesses, while only 28 percent plan to pass on ownership to the next generation.
These numbers are not bred out of lack of desire to pass the business on; choosing a successor within the family is the norm in China. In fact, survey by Forbes China found that 65.8 percent of business owners in the country hope for a second-generation family member to take control of the business. But the “one child rule” that has controlled the Chinese population growth for decades has shown to be prohibitive in this instance.
No History of Succession Planning
As one might expect, the family business ecosystem in China differs quite a bit from the United States. Certainly the Chinese culture and attitude towards family and the unique economic climate of China play substantial roles. Still, one of the most glaring distinctions is the relative youth of these businesses.
Private enterprise has only been allowed in China for a matter of decades. As a result, many Chinese family-owned businesses still remain controlled by their founders. In the United States (and certainly in older countries in Europe and elsewhere), family business succession has become a regularly discussed topic, with experienced advisors and commentators providing guidance. In these places, we have seen countless generations succeed and fail at the task.
In China, however, due to a long gap in personal business ownership, there are very few examples of succession, which has contributed in the lack of succession plans or the lack of recognition for the need of one. According to the PwC survey, 22 percent of family businesses in China have some sort of succession plan, but only 6 percent are robust and fully documented, as compared to the 16 percent global average of documented and legally reviewed plans.
This does not bode well for the future. As the Asialinks Essays article states, “Family succession is not an easy issue to deal with anywhere in the world, and the problem is particularly acute in China. Fewer than 30 per cent of family businesses around the world survive the third generation as family owned businesses.”
Not only has the first round of generational shift not happened for many Chinese family businesses, certain observers have suggested that this unusual set of factors in the Chinese family business community will lead to a substantial percentage of Chinese family businesses going through the sometimes-rocky process all at the same time. With understandable concerns, some have even dubbed it a succession “crisis” for China.
Still, there is plenty of reason to be optimistic about these young family businesses. They have unprecedented visibility, technology and access to markets.
“Entrepreneurism is very strong in China,” said Locke. “With the growing educational achievements and business sophistication of the children of Chinese business owners, these businesses are diversifying, going global, and becoming more high-tech focused.”
It will be interesting to see how the family business community evolves in China and what lessons we can learn from it.