Business system analysis of Chinese Family Business (CFB)

By | April 11, 2014

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1.        Introduction

 

When the United State succeeded in business and become the super power in term of political, cultural, technological and economy in the world, people tried to conclude the American way of doing business and name it as Anglo American (AA) model. There was once a period when people very much admired the economy miracle that achieved in a free market, some even believed when any market become commercialized and democratic enough, the American way will be the best way of doing business. But when the other economy power appear such as Japan and Korea with different business practices but their way of doing business are also very efficient and effective. In contrast the AA model that tried to be used in some countries finally did not fit well. Moreover, when Japanese become highly developed and politically democratic, they still used their own way of doing business. Then people also believed there is a Japanese model. And actually every economy deserves its own business model as no two economies will be the same.

 

We need to use a business system framework to see the different business practices because there are different aspects in the framework, by comparing the difference performance of two countries’ business behaviors in a certain aspect we can see reasons of some different business behaviors in certain conditions. And a business system makes conclusion for the common and similar business behaviors representing the features of an economy and further differentiate from other business systems. The most important meaning of using a business system framework is that it gives general knowledge of a business system to people who are not living in the country. This will reduce the international frictions people understand more about their partners’ different business model.

 

 

 

2.        Business system

 

Business systems are distinctive configurations of firm-market relations which govern economic activity in different environments (Whitely 1992). According to this definition, the nature of a business system is relation between the company and the market in which the company is doing business and a company’s behaviors need to be changed to adapt to the different environments. And there are four key institutions that will make major influence to the organizational and management practices. It’s believed that firs and markets are social products that lock actors into certain behaviors.

 

3.        Business system analysis of Chinese Family Business (CFB)

 

A family business refer a form of enterprises in which both ownership and management are controlled by a family kinship group, either nuclear or extended and the fruits of which remain inside the group being distributed in some way (Shehiro 1993). Chinese family business is a business model that used widely in China though it is not restricted in China; there is also China family business in Europe. Here the CFB in the mainland of China, Hong Kong and Taiwan will be researched for the convenience of study to make the analysis more specific and pragmatic.

 

In 2004 in the private business, there were 3.44 registered units of family business in the mainland of China, of which more than 90% were family business (Bai 2004). Now the percentage of the Chinese family business has come down with more and more private business becoming bigger and adopting the Anglo American business model. But still the CFB is playing an increasing role in supplementing the economy and creating employment and as a business model its effective function of the focus of intensive resource usage is still working very well in a less rule base business environment. In this part the CFB will be analyzed under the framework of Whitley’s national business system in term of four components and three elements.

 

3.1    Four components analysis

 

3.1.1            Role of state

 

Since the reform and open up in 1978, all levels of the Chinese government have been creating conditions and enacting policies that are beneficial to the growth of the state own business and this has put the Chinese family business into an awkward position. To the CFBs there are usually two kind of bad relations with the governments: the first is that the companies were raised up the government and the government will require the companies to pay back. Tianfa Group in the Hubei province provides a good explanation of this relationship. Tianfa Group’s CEO Gong Jialong started his business in the 1980s with the bank loan which was under the name of the Jinzhou Light Industrial Bureau which was a local government department because in the 1980s it was nearly impossible for an individual to get a loan from the bank, only the state owned companies enjoyed this priority. Later the government also helped the group a lot in its road of growth. But the dispute of ownership between the local government and Gong Jialong had never stopped. Also the government required the group to help an industry out of difficulties and this had transferred the quality business of Tianfa Group into bad business and finally indirectly led to the failure of the group (Jing 2007). In this case, the Chinese family business Tianfa Group could not even be form without the help of the government because the private companies’ disadvantage in applying for bank loan. By controlling the capital market the governments make the family business have to build up very close relationship with them or else what waits for them is just bankruptcy. After long term practice, the internal loan within the family business become efficient and make the family self sustainable.

 

The second bad state business relation is that the government does not want the companies to leave. In China since the reform and opening up, the lure for economic growth maybe has exceeded that in the United States. And the governments also need the economy to growth and the most direct growth is the GDP growth. The stable growth of GDP is also a kind of measurement of government officials. So the competition for good investment and good companies is common between the governments in China whether it is provincial government, municipal government or even town and village governments. By focusing in the digits, the government official would never want to release a large company to go to other places which will decrease the economy growth of the government. This seems to be ridiculous but it happens frequently. Another most disputable man “Yang Yong”, who started up “Brilliance Auto” (known as Huachen Auto in China) which also has close relationship with the local government at the very beginning, also experienced a time of difficult relationship with the government. In 1992 under the brilliant capital operation by Yang Yong Brilliance Auto was successfully listed in the United States (Unknown 2009) becoming the first Chinese company to be listed in the US, but when Yang Yong was trying to invest in the south the government was not happy with this. The officials did not want to let go the investment and so the dispute between Yang Yong and the Liao Ning Provincial Government upgraded and resulted in the separation of Yang Yong and Brilliance Auto, again the ownership problem became the center of the leverage and the government again won but to the economy, it is definitely a lose-lose ending.

 

3.1.2            Financial system

 

Despite the large Chinese Family Business that have established modern corporate government structure and are able to access to the financial service from the capital market and banks, other medium and small CFBs are forced to turn to other ways of financing. Experimental studies show that medium and small CFBs in the mainland of China obtain their capital by internal finance in form of a lot of household resources pumped into the family business if needed and there is no clear line between the family finance and its business finance (Chen & Ye 2006). The advantage of internal finance is that this way of finance is fast responsive and there is no need to go through any procedures and resources could be ready in a very short time. But there are also disadvantages of the internal family finance, one of which is that the internal finance usually is not enough for the fast growth of the business and it is not stable particularly in time of difficulties. One of the preconditions of the internal finance is the high trust within the family business and the family. Without the trust that built on the personal connection and family connection, such verbal borrowing would be unrealistic.

 

Because of the instability and comparatively not sufficient money, the medium and small sized Chinese Family business will sometimes have to try the external funds to keep the cash flow normal. And researches prove that debt financing is the major choose of the medium and small sized Chinese Family business for external financing. Such debt financing takes form of borrowing from friends and relatives and loan sharks. More over the CFBs are less likely to turn to the venture capital for funding to avoid the sharing of the control over the whole family business.

 

3.1.3            Labor system

 

With the feature of intensive use of social resource of Chinese Family Business, the CFBs have the advantage to mobilize the talents in low cost at the beginning stage of the founding of the CFBs. Because of the close relationship between the family members and within the social network, the CFBs are able to utilize large pool of labor force with high commitments. The competitiveness sourced from labor force labor advantage comes from the unity of the members in term of the fast information spreading while the market environment changes (Wang 2003). More over the CFBs in this stage could focus on the business and do not need to motivate the employees because they are highly dedicated to the CFBs already.

But in the long term, the labor system could also change from advantage into disadvantage. In this part of the topic of labor system, let’s focus on the most mentioned and long lasting topic: the succeeding of the Chinese Family Business in the top level. It is easy for the CFBs members to accept an employee in the low position of the business but it would not be easy for them to accept a general manager that has nothing to do with the family. According to the inheritance culture and masculine cultural conventions, the successor of the general manager would usually be the oldest son of the family of the last general manager. But the problem is that the son of the general manager will not necessarily be capable enough to be a qualified successor to manage the family business. Moreover, there is an old Chinese saying that “the fortune will not last more than three generations”. While second generation successors of the CFBs are not qualified enough and also the members are not willing to accept a general manager from the outside the family business, the internal political dispute may start between the potential candidates which finally break up the family business.

 

But there are also many successful stories in the CFBs. For example, Hong Kong billionaire Li Jiacheng had sent both his sons to the US to study and they both lived a difficult life in the US without too much financial support from Li Jiacheng. His second son Li Zekai did a lot of part time jobs including a caddie job in the golf court every Sunday (Cai 2008). Such kind of college education and civilian experience has cultivated many successful successors for the CFBs.

 

3.1.4            Cultural conventions

 

Under the influence of the traditional Confucianism, the Chinese Family Business is based one of the two most important concepts: family (Jia), and the other concept is country (guo). People often compare these two concepts and the family concept is considered to be the reflection of the country concept. In the field of concept, Xiao (to obey the older people’s will such as parents and grandfather and grandmother) is the most valuable and necessary character. And in the bigger field of country (guo), to be dedicated to the country is called “Zhong” which is the most valuable character which is similar to the “Xiao” concept in the family. If one is not obeying his father’ will and thus is considered not to be “Xiao”, then he will not consider of use in the society.

 

Because of the focus of the Quanxi (relationship) within the family, in the tradition of Chinese culture, there was no concept like community in China like some western country have, in the China Family Business, lots of effort has been used in the keeping the harmony within the Quanxi network of the family. And in compare, little effort is spend on the relationship between the families (Song 2008). One of the consequences is the low trust in the society but very high trust could be found inside the Chinese Family Business. One rule that follows up high inter-firm trust system is that there will be serious moral punishment for those who betray their family.

 

And because of the importance of the concept of family in the CFBs, the members inside the CFBs tend to avoid direct conflicts between the members as the Chinese believe “harmony is priority and harmony creates fortune”. This tells the reason why the Chinese Family Business likes to hire the family members and relatives that have kinship with the core family. One reason as previously talked about is that these family members could be easily mobilized as human resources within the Quanxi network, the other reason is that if the core family that begin the CFB do not hire the other family members or their sons as request, there will be conflicts caused inside the family which is the least expected because it damages the harmony of the family network.

 

 

3.2    Three elements

 

3.2.1            Nature of economic agent

 

As most Chinese Family Business are struggling in the gaps between the state own companies and the private non-family business, they are eager to start up their owned business with acceptance of great risk. In such situations, it is the boldness, insightfulness and determination of the family business entrepreneurs that help them succeed in the unstable business environment where power could exceed rules and institutions (Unknown 2008).

 

In traditional Chinese Family Business, companies are considered to be private property of the core family which controls the whole firm. So the ownership of the companies is basically on the hands of the family. In order to remain control of the family business, many families are sensitive of the ownership of the companies, this is why many of the family business though they are quailed to introduce venture capital to upgrade the scale of the companies for further and faster growth but in fear that they may lose the ownership of the CFBs the owner of the firms will remain protective and conservative about the sharing of the ownership.

 

Even in a family, the owner ship of the company could only be on the hand of one person, there is only one boos in a Chinese Family Business and there are not exceptions even between brothers. For example, Shen Guang Security was one of the three that were approved by the government to run the security business in Shandong province. When the family business reached 200 million RMB and the elder brother Sun Chenggang and the little brother Sun Chengqi have different visions for the company but they both owned 50% of the share of the company, the dispute appeared. The at last under the mediation of the court the little brother Sun Chengqi agreed to sell all his share to his brother (Wang 2009). This again proves that in a Chinese Family Business, there must be only one king who is controlling the firm and making decisions.

 

3.2.2            Market organization

 

China Family Business companies are mostly self reliant. It is true that CFBs are operating in a complicated network system which is common in China; they have to deal with relationships with the government, competitors, suppliers and customers. But as they are very sensitive of the ownership of the firms and do not want the outsiders to intervene their operations, in such complicated network system they manage to still sustain relatively independent especially in the finance. This has caused low trust outside the family business and keeping them competing alone. Because of this conservative thinking, most of the Chinese Family Business tend to generate an autocratic decision making model.

 

3.2.3            Labor coordination

 

When the majority of the CFBs are still of medium and small size and have their power of decision making fall upon the entrepreneurs to make decision according to their experiences, there are also some leading Chinese Family Business that through reform had changed to a more modern enterprise system with the traits of separation of management and ownership, open and fair human resource management and so on. Let’s look at the famous kitchen and bath appliances brand Fotile for reference. In the field of management with the retirement of Mao Lixiang the first owner of the family business, his only son Mao Zhongqun was appointed as the general manager of the company. Except for the three most power members of the family that occupied the general manager, chairman of the board and the chief financial official. Other than these three positions the company bans other family members to join the management team and introduce talents from outside the family of whom many have working experience in the state owned enterprises (Unknown 2006) and these inject fresh blood to the traditional family business. And in the field of ownership, the family possesses 100 percent of the Fotile. And in the most disputable inheritance of family business, Mao Lixiang insisted that his son could be the successor if he has the ability but he can also change one if his son prove unsuitable. And by smooth transition from Mao Lixiang to his son, the Fotile is still growing to be one of the top 10 kitchens and bath brands. The successful story of Fotile proves that Chinese Family Business can also maintain its control while changing to a modern management system.

 

4.        Convergence to AA model

 

People tend to view culture as static, but look around the world the American culture is everywhere, there is no escapes for anyone who is living in a country that has been linked to the world. Culture does change and is changing fast and continually. The same thing happen to the business systems, with the great influence and the successful experience the AA model that is used by major western countries has dominated the business practices in the international business. The Chinese Family Business has the trend to change to the AA model especially when there is a shift from non-rule base to a more rule base business environment and the AA model seems to be more effective in a rule base situation and the Chinese Family Business is effective when the rules are not well functioning and need the cultural and market conventions to keep the system in function. But with the reform and development of the Chinese Family Business system, different constitutional base that the Chinese Family Business has will keep it away from total convergence to the AA model.

 

Reference

 

Bai, Y. 2004, 浅议政府在家族企业成长中的作用 (Research on the effects of the government in the growth of the family business), accessed on 26th June 2010 [online] available: http://qkzz.net/article/96c03df9-d0ad-4f12-bef3-01030e13a951_3.htm

 

Cai, E. 2008, 中国家族企业接班人之忧 (The worry about the inheritance of the Chinese Family Business), accessed on 27th June 2010 [online] available: http://www.jqao.com/guanligongcheng/200807/30-303976.shtml

 

Chen, L. & Ye, C. 2006, A survey of Studies on Small and Medium-Sized Family Business Financing, Journal of Zhejiang University: 1008-942X (2007) 04-0172-10

 

Jing 2007, 天发集团周年祭:29亿元银行黑洞待填 (Memory of Tianfa Group:2.9 billion bank hole to be filled), accessed on 27th June 2010 [online] available: http://www.xyzlove.com/transshipment/tora/tfjtznj_29yyyhhddt/tfjtznj_29yyyhhddt.htm

 

Shehiro, A. 1993, Family Business Reassessed: Corporate Structure and Late-Strating Industrialization in Thailand, The developing Economies, XXXI-4 (December 1993)

 

Song, G. 2008, 基于核心价值观的家族企业文化建设 (Family Corporate Cultural Construction Base on Core Values), Corporate Energy, Vol 3 (2008)

 

Unknown 2006, 从方太案例看中国家族企业的治理结构 (Corporate structure of Chinese family business: Fotile) accessed on 27th June 2010 [online] available: http://www.zgbfw.com/info/pump-news-69141.html

 

Unknown 2008, 中国家族企业现状、问题与建议 (Chinese Family Business’s Current Status, Problems and Suggestions), accessed on 27th June 2010 [online] available: http://www.ynetc.gov.cn/Article_Show.asp?ArticleID=2364

 

Unknown 2009, 仰融其人以及仰融事件的前前后后 (Yang Yong and Yang Yong Event), accessed on 27th June 2010 [online] available: http://auto.ifeng.com/news/domesticindustry/20090629/56401.shtml

 

Wang, Y. 2003, 中国家族企业的优劣势分析(The advantages and disadvantages of the Chinese Family Business), accessed on 27th June 2010 [online] available: http://www.mie168.com/human-resource/2003-08/31150.htm

 

Wang, Y. 2009, 中国家族企业之殇 (Chinese Family Business’s Wound), accessed on 27th June 2010 [online] available:  http://wangyukun.blog.sohu.com/110004594.html

 

Whitely, R. 1992, Economic Dynamism in the Asia-Pacific, Routledge, p240