Authors: Tim Clissold
The meetings were stiff and uncomfortable; several were at ministerial level and kept to a set pattern. Although the rules at these types of meeting are less rigid than at a formal dinner, there
is still an etiquette to dealing with high-level Chinese officials. When they are introduced to new acquaintances in a formal setting, the Chinese have an elaborate self-deprecating habit of
talking themselves down. But the customary expressions of worthlessness from the host are expected to elicit strong protests from the guests who should respond with excessive compliments
elaborating on the fame of their host, the lavishness of the surroundings or anything else appropriate that springs to mind. Of course, I knew that the shabby hallways and rusting pipework in the
ministries were not exactly what Rubel and Smith were used to in their offices in New York. But my nerves were still frayed when the ministers made the standard opening apologies for the poor
surroundings and they just nodded their heads in agreement.
I sat anxiously through the meetings, waiting at each pause for Rubel’s next question. There is a strict hierarchy to the seating at meetings in China; the most important participants sit
at the centre of the long meeting tables. Given the august company, Ai Jian and I had been consigned towards the opposite extremities, so I couldn’t even influence his translation with the
odd undercover whisper.
The meetings generally went well; Rubel asked his pointed questions and the Chinese gave their elliptical answers, but generally there seemed to have been some form of a meeting of minds.
Towards the end of the trip the atmosphere grew gradually more relaxed and on the last day, just before Rubel and Smith left for the airport, we had lunch with the Mayor of Changchun. We had
figured that it might be tempting fate to end up with a
baijiu
dinner. Ai Jian ordered the dishes so the meal was a relatively straightforward affair, with the only excitement – minor,
at that – caused by a plate of sea slugs. Rubel fired off questions from every angle as Smith fumbled with his chopsticks and Pat and I finished the beer until, just before we got up to
leave, Rubel asked his last question.
‘Well, Mr Mayor, we are very impressed with you but we’ve heard that officials in China move about a lot. So if you move to another city how do we know that your successor will
follow the same policies?’
The answer came without the slightest blink.
‘Well, Mr Rubel,
we
are impressed with
you
but we’ve heard that executives in America move around a lot. So if you move to another company how do we know that your
successor will pursue the same strategy?’
The Mayor had delivered his reply absolutely deadpan and held Rubel’s gaze for a moment. Then, just as the tension was mounting, his face, with perfect timing, broke into a broad grin. To
his credit Rubel laughed as loudly as the others but it had been a great put-down and probably a close call. I loved the self-confidence, the almost barefaced cheek of the new generation of Chinese
officials. Here was a man landed with the responsibility for a deadbeat industrial city in northern China with all its poverty and unemployment and decay, up against a visitor from a distant land
who controlled sixty billion dollars. It was pretty obvious who held all the cards but the Mayor never once let the mask slip; I admired his gall in taking them on eye-to-eye. He seemed able to
meet them on their own level with the same mixture of brazen self-confidence and bluff. In another life, Mayor Huang would have thrived on Wall Street.
By the time that Rubel and Smith left China, they had seen enough to get them interested. Pat went back to the States late that August and went up to one of Rubel’s holiday homes in
Vermont together with Smith. They sat on the porch in the late summer sunshine. That night, Pat called me in China and told me, ‘We got the deal!’
IHC had agreed to go out and raise a hundred million bucks for the Chinese auto industry.
With IHC behind him, Pat was on a roll. By October the documents were ready and he toured the States. He visited all of IHC’s major clients and, after about six weeks, I
got one of his regular calls in Beijing. ‘So, how’s it all going?’ Several minutes into the conversation, he said, ‘Well, I’ve got eighty-five for you.’
‘Eighty-five?’
‘Yeah, eighty-five million. We got circles on eighty-five million of cash from investors. Should be up to a hundred and fifty by Christmas. You’d better be able to invest it!’
And with his characteristic roar of laughter, Pat put the phone down.
Eighty-five million bucks. That seemed like a lot of money. Goddammit, it
was
a lot of money! Bucket loads, in fact, especially in China. In those days, raising that kind of capital
inside China itself was virtually impossible whereas in the States it had seemed almost routine. Gradually, I began to understand the power of the money machine in America. There, every day,
multimillion commitments were made by small groups of people and were based on, maybe, a two-hour meeting and some macro-analysis of countries that they had never visited. It just depended what was
in vogue at the time. In the late 1990s, it was
dot.com
. Back then, it was China.
Pat told me that during his tour of the States in early December, he had travelled up from New York to Stamford together with Rubel to talk to a large pension-fund investor. They went through
their pitch and then went back to Manhattan, about an hour away on the train. When they got back to IHC, there was a message from the investor left on Rubel’s desk. It read; ‘Myron, you
and Pat did a great job today. You got your fifteen million, Pam.’ That was it! The same investor came up with another ten million a few months later.
Despite these surprises, it was the wealth of individual people in America rather than that of the institutions that really amazed me; I had no idea that such vast fortunes were controlled by
families or individuals who had either made or inherited money. During Pat’s first money-raising tour, IHC had arranged for him to attend a breakfast meeting with a group of wealthy
individuals in Houston. Although the smallest permitted investment was a million dollars, there were seven people at the breakfast all fumbling around with their toast and marmalade, dropping their
napkins and shouting for more coffee and ‘grits’ as Pat gave his presentation. When he had finished, one of them asked two questions. Pat couldn’t answer the first as it was about
some obscure tax loophole, but the next one was easy.
‘How many factories have you personally visited in China?’
Pat launched into a set-piece exposition about how we had visited a hundred factories in a hundred days on our Long March across China. It must have been convincing. A few days later, on the
basis of that hour-long breakfast meeting and two questions – one of which hadn’t even been answered – the investor signed up to invest five million dollars of his personal money
and wired it across a few weeks later.
I found it difficult to pull the people at Pat’s ‘Breakfast in America’ and the workers up in the Chinese hills into the same world-view. It seemed as if the factories, where
raising a hundred thousand dollars could take years of effort, were on a different planet. Curiously, that was something that excited me. I found the real prospect of bridging that colossal
cultural and financial gap hugely inspiring; we were about to embark on an adventure, that was for sure, but it was one that might bring hope to those forgotten communities that had no way to
access the resources that they needed to survive. Here was a unique opportunity, the chance to bring capital into China on a scale that could rejuvenate businesses that employed thousands; and in a
scheme where both sides could win.
Things fell into place quickly afterwards. Once the ‘high-net-worth-individuals’ – as really rich people in America were known – had signed up for their
eighty-five million, the big institutional investors moved in. Early in the New Year, it looked as though we would raise two hundred million dollars. But Rubel back in New York was nervous.
‘OK, I know you’ve seen all these factories, but how do we know you’ll actually be able to invest all this money? Two hundred is a lot for the first pull.’ Eventually, he
cut back the commitments and we accepted a hundred and fifty-eight million dollars. Pat didn’t like it. He wanted to get as big as possible at the first strike, but he relented and at the end
of February the contracts were signed and the first instalment squirted into our bank account. I still couldn’t quite believe it. The first money-raising round had exceeded my most optimistic
expectations; once the celebrations had died down, we turned our minds seriously to investing it. It looked as if all the hopes were about to change into reality.
With a hundred and fifty million bucks at out disposal, it wasn’t difficult to make waves throughout the whole industry. Although we had actually spent many months
patiently researching China, building up the big picture and visiting factories across the nation, to the outside world it seemed as if we had suddenly burst onto the headlines from absolutely
nowhere. We were all over the press. The
Asian Wall Street Journal
ran a whole page on us. The article, which was entitled ‘The Insiders versus the Outsiders’, compared our
chances with another group of Hong Kong investment managers who had raised ninety million for one of the big Beijing-based industrial groups. We were the ‘outsiders’ from Wall Street up
against the ‘insiders’ from Hong Kong who claimed to have all the right relationships in the inner chambers up in Beijing. The article was inconclusive but said that the
‘outsiders’ had a more coherent investment strategy; it might pay off in the long run if ‘the outsiders’ could navigate their way through the tangled relationships up in
China and find the right businesses to buy.
With all that money burning a hole in our pockets, the pressure was on to invest so I was relieved when I managed to persuade an old colleague from England to come out to China
and help us figure out what to do. Michael and I had worked together at Arthur Andersen before he left to join a private equity house in London and I knew that he had much more experience with the
nuts and bolts of investing than I had. Together, we hired a team of eight bright young Chinese graduates who had studied English or finance at one of China’s top universities. They helped us
churn through the reams of figures we’d collected and figure out which were the best factories to invest in. I thought that we had the right team in place, but Rubel became more and more
nervous as the weeks passed. He wanted to see some action and the telephonic board meetings between China and the States started to become tetchy.
We had agreed to focus on Changchun to start. We had to get something done quickly before Rubel exploded. The Mayor was on our side and the factories up there were smaller than many in the other
big cities, so we felt that it was the right place for us to begin. The Director of Mayor Huang’s special government office, Mr Jiang, accompanied us to each of the factories and entertained
us in the evenings. But the visits were tough going and we made slow progress. The businesses were so confusing: sometimes it was even difficult to figure out exactly what the factory made; trying
to understand their markets was verging on the impossible. We seemed to spend hours in freezing offices, squinting at schedules of figures that never quite tied up.
The ‘entertainment’ in the evenings was also a strain. The Mayor had told Jiang to keep us happy, so there were nightly banquets which, though not quite on the scale of the
Mayor’s epics, still involved multiple courses overspiced with garlic and washed down with
baijiu,
or beer if we were lucky. The parties afterwards were even worse. Night after night
we were invited to dances at the various factories. Even in March, the temperature outside was still well below freezing and the heating in the dance halls never seemed to work. We all wore coats
inside and, as we sat huddled on the rows of chairs on the edge of the dance floor, with our frosty breath illuminated by the disco lights, we were dragged out to dance with girls from the factory.
Egged on by the doggedly well-meaning but hopelessly unobservant Jiang, the factory girls would come out, one after the other, in endless succession to ask to dance. It seemed to go on for hours,
but I never had the heart to refuse. We’d stand swaying to the reverberating sound of the Chinese version of ‘Only You’ until midnight in a freezing dance hall with flashing
Christmas tree lights taped to the walls, clasped in the arms of a female factory worker who was wearing three overcoats. With all the padding, my arms hardly reached round my dance partner’s
back. Michael said that it felt as if he was ‘dancing with a bear that’d washed its hair in garlic’
Michael and I spent many weeks in Changchun with Madame Tan trying to ‘put the numbers in the spreadsheet,’ as Pat had rather tactlessly put it to Michael. Pat was still focused on
the big picture, impatient with the distracting details of each individual factory but convinced that the strategy would work as a whole.
Madame Tan was the Director of the ignition-coil factory that we had visited on our first trip to Changchun when we’d met the Mayor. She was a jolly round-faced woman in her late thirties.
Her ignition-coil factory was perfect for a first investment. The products were simple and Madame Tan thought that she only needed about two million dollars to push the factory into overdrive. She
had just landed big orders from the new German passenger-car line down the road, so the market seemed secure. She just needed our money to buy more equipment to meet the new demand. As we waded
through the figures and the weeks rolled on, the four huge iron chimneys at First Auto Works, with their spiky crowns on top, became a familiar sight on the horizon.
In those days, foreign investment in China was almost exclusively in the form of a ‘joint venture’ where both the Chinese and the foreign side had a share in the
business going forward. Generally, the foreign partner invested cash while the Chinese partner contributed the assets at the factory. Once the deal was struck, the contracts had to be approved by
the Government; without the red ‘chops’ from the ‘relevant department’ no foreign investment contract was valid in China. But the regulations were confusing; even Director
Jiang seemed vague about the details. It was just like at the university where many of the regulations were ‘internal,’ but this time it seemed as if the people on the inside
didn’t really understand the rules either. No one could tell us which documents were needed and which of the municipal committees and commissions had to give their chop before final approval.
There was a maze of confusing regulations requiring accountant’s certificates, tax registrations and valuation reports before the joint venture could be approved. Many government officials
didn’t have a clue how even to start working their way through the labyrinth and whenever we asked what to do, each one gave a different answer.