Authors: Tim Clissold
Sometimes Madame Tan could be equally perplexing. She had imported some specialist equipment from Italy the previous year but it was still locked up in a warehouse. When we asked to see it, she
was evasive. During one of her many trips out of town, we persuaded one of the other managers to open the warehouse for us. We found that the machines had never been used; they were still in their
packing cases. So why did she want more equipment? We had noticed that there was another factory on the same site as Madam Tan’s – the Changchun Number Two Wireless Factory – but
she seemed extremely anxious to prevent us from meeting anyone from the wireless factory.
At times, Madame Tan would suddenly disappear for a few days without any explanation. At first, I didn’t think anything of it; after all, she could have been on a normal business trip. But
after one such absence she came to collect us from the hotel in a huge black stretch limousine. It was a Cadillac. I’d never seen one in China before. The crowds of early-morning bicyclists
stared at us as we left the hotel. The car, with its enormous length and gleaming black paintwork, slowly wound its way with almost feline stealth around the potholes in the road and the huge
clouds of steam that poured out of the manhole covers into the freezing air. But a couple of weeks later the Cadillac had gone; it seemed as if the ignition-coil team had suddenly fallen on hard
times since they appeared to have no car at all. At lunchtime, when we went to a restaurant just down the road, we were driven over on an old ‘Liberation’ truck. We sat there, in our
suits and ties, shivering on a battered sofa that had been dumped onto the back of the truck together with some filthy old sacks.
Meanwhile, back in New York, Rubel was becoming increasingly nervous and unpredictable. As we struggled to reach a deal with Madame Tan and find our way through the maze of government
regulations, the drum beats from New York got louder and louder. My heart sank when I heard that Rubel had arranged to come to China in May. But that was still two months ahead; we hoped that by
then we would have signed the deal with Madame Tan and that it would keep him off our backs.
In April, the deal was struck. It was small; just the right size for us to cut our teeth on. We agreed to invest a million dollars for 60 per cent of the business. Madame Tan would invest the
factory’s land and buildings, plus the equipment, for her 40 per cent share. And she would continue to run the factory. It seemed like the perfect deal. Rubel was pleased and the tension
abated. We were relieved as well; with the first deal out of the way, we could get on with the job of putting the rest of the capital to work.
A few weeks later, Madame Tan called to say that there was a problem. ‘Our factory’s land, you know. It’s not registered in our name so we can’t put it in. Does that
matter?’
Michael had taken the call. ‘Of course it matters!’ he said. ‘If you don’t own it, who does? They’ll want to charge rent. Anyway, if you can’t put the land
in, how are you going to pay for your 40 per cent?’
Madame Tan said that the wireless factory next door owned the land. When I heard the news, I said, ‘That’ll be fine. We’ll just get Mayor Huang to sort it out. The land’s
all owned by the State anyway, so it shouldn’t be a problem.’ We had several meetings with Director Jiang and his Investment Bureau and, later on, with Mayor Huang. He promised to
instruct the Land Bureau to re-register the land. There was a lot at stake for the Municipal Government; if we made that first investment in Changchun, others would surely follow. But the weeks
dragged on. There was no news and the tension mounted as Rubel’s arrival drew closer. Then, a week before he was due in Beijing, Madame Tan called to tell us that it was all off. A huge
dispute was raging over the title to the land. Mayor Huang had thrown his weight behind Madame Tan, but the wireless factory had been lobbying the Changchun Party Committee. There was deadlock. We
were confused. How could such a simple matter of a small and not particularly valuable piece of land become so complicated? It was puzzling and the timing was awful. At that stage, all we had to
look forward to was Rubel’s reaction when he heard the news.
I was not in China when Rubel arrived but I heard that the meetings were horrible. Michael called me afterwards in a state of despair. He had been given the task of presenting
the progress of our investment programme to Rubel and his team of simpering assistants. Rubel kept butting in, firing distracting questions at Michael, not really concentrating on the answers and
complaining that it was all too complicated. At one point, when Michael was going through the government-approval process for foreign investment, Rubel just wouldn’t let go of a particular
detail. As Michael struggled to explain a process that many Chinese government officials themselves didn’t really understand, Rubel became highly agitated. In practice, local officials often
interpreted the vague regulations in ways that suited local conditions, but this didn’t stack up with Rubel. He smelt a rat. When Michael, with increasing exasperation, said, ‘But
Myron, you’re just looking at it through a Westerner’s eyes,’ the long-awaited explosion erupted. ‘But I
am
a Westerner,’ Rubel yelled, ‘I
am
a
Westerner. How the hell
else
am I supposed to look at it? I wanna know where every investment project is in the system. I want a list of projects at each stage of the process. You must have
that, so show me the list!’
The Chinese staff were by then looking uncomfortably at their shoes. This was definitely not their style.
‘Show me the list!’ Rubel shouted, bouncing up and down in his chair.
‘What?’
‘Show me the list!’
‘But there isn’t a strict sequence to how things get done.’
‘Show me the list! Show me the list! Show me the list!’
Apparently, the ranting continued for several minutes until Pat suggested a break. They were all exhausted by the time that Rubel left for Japan the following day.
After Rubel left, we regrouped. The experience up in Changchun had taught us a lesson: the workings of Chinese business, and apparently even parts of the Government, were much
more chaotic than had appeared from the outside. In retrospect, events and comments that we had passed over in the hills in Sichuan took on a new significance. I had been puzzled at times by the
factory directors’ apparent disdain for our two fellow-travellers from Beijing – they were reasonably senior officials from the Ministry on a mission to bring money to the remote
valleys, but often their requests for information had been brushed aside. The directors had been openly scornful of the Central Government bureaucracy, those ‘old men who squatted in their
offices in Beijing’. When I told Ai Jian that I couldn’t understand why everyone seemed to ignore the officials from the Ministry, he used an old Chinese adage: ‘The hills are
high and the Emperor is far away.’ It seemed as though the far-flung extremities of the ancient kingdom still paid little attention to the capital.
After these experiences, it was fast becoming obvious that if we were to invest our money safely we would have to take a majority share in each of the businesses. That way we’d be able to
retain a reasonable degree of control. Negotiating a majority stake would be difficult; but Pat said that he reckoned that most of the businesses we’d seen were so desperate for capital that
they’d agree in the end. He was right. We eventually came up with a formula that we thought would be acceptable to both sides: the original factory directors would remain in charge of the
daily operations but, in return for our money, we would always take more than 50 per cent of the shares and a majority on the Board. And Pat would be chairman.
The summer that year in Beijing was unusually hot and wet; every day a cycle seemed to set in with blue skies at dawn and a gradual build-up of heat and humidity during the day
that cleared again in the late afternoon with colossal thunderstorms. Often the clouds in the late afternoon were so thick that the city would be plunged into darkness as the rain came down in
great black streaks. The rising tension in the weather through each day matched the wider mood as the months rolled on, but eventually it broke at the end of the summer when we closed our first
deal.
We finally made our first investment in a factory high up in a steep-sided valley with mountain streams, stone bridges and bamboo groves, tucked up far away in the central province of Anhui. It
had been founded in the early 1980s by one of China’s new breed of entrepreneurs, a Mr Shi. Originally from the river town of Jiangyin in the flat-lands of Jiangsu, he had ended up in the
mountains after the Cultural Revolution and had never gone back. His factory had always been outside the state-owned system so Old Shi had grown it from nothing, relying entirely on his own
resources. Fifteen years on the business was making a fortune supplying rubber parts to China’s automotive industry.
The negotiations to establish the joint venture were surprisingly straightforward. Somehow Shi seemed to know how to deal with foreigners; he was clear about what he wanted, he wasn’t
hemmed in by a state-run bureaucracy and he made quick decisions. He was flexible and only dug his heels in on two points: our cash had to come quickly and he was to remain in charge. After a
couple of months, we agreed a handshake deal: twelve million dollars for a 60 per cent stake in the business. The accountants and lawyers were dispatched to work out the details.
During this lull in negotiations, I had to go to America for a commitment that I had been dreading. IHC wanted me to address a large group of investors in Los Angeles. My topic was China so it
should have been easy. But the speaker immediately after me was Dr Henry Kissinger. The prospect of lecturing in front of hundreds of prominent investors and a man who had personally known Mao and
Deng sent me into a paroxysm of nervous tension. As I got up to speak, I scanned the audience anxiously for the famous hornrimmed glasses reflecting the stage lights. In fact, Kissinger appeared
neatly from one side of the stage after I had given my pitch and spoke for forty minutes, without notes, on the balance of global power between almost every significant country. Short and rather
stout, he mesmerized his audience and was fallen upon by fawning millionaires once he had finished speaking. Fame, it appeared, was a more highly valued commodity in America than the odd hundred
million. But ‘The Doctor’, of course, had both.
When I arrived back in Hong Kong on the journey back to China, I was in for a shock. I knew that Old Shi, with his factory up in the hills, was a risk-taker, and that he had borrowed heavily
from local banks during the boom that had been set off by Old Deng’s Southern Tour. But two years on, the government had started to rein in the overheating economy and Shi was under pressure
from his bankers. While I was away, he suddenly arrived in Beijing and presented Pat with a draft investment contract.
Pat had called me as I arrived in Hong Kong a couple of days after Shi’s visit.
‘Yeah,’ he said, ‘Shi came up to Beijing with this draft contract, so I signed it.’
‘What?’
‘Yeah, I signed it.’
A pause.
‘You know that the lawyers haven’t signed off on the wording yet?’
‘Yeah, I know.’
‘And the accountants are still checking the numbers?’
‘Well, you know that the contract isn’t valid until it gets chopped by the Government. It’ll take ages before Shi gets the approval.’
‘And the Board papers.’ I continued cautiously. ‘You know, Rubel’s never even heard of the deal.’
‘Look, I’m fed up with all the bleating from New York. What are we supposed to do with all that cash? Just leave it in the bank account? I don’t think so! So, stop worrying,
it’ll take Shi months to get the approval. Anyway, how was I supposed to refuse?’
‘Well, you could have said “No”,’ I suggested.
‘Well, you know me,’ Pat said. ‘If I was a girl, I’d always be pregnant!’
Pat received Shi’s jubilant call before the end of the week. After he’d met with Pat in Beijing, Shi had flown directly to Hefei, the provincial capital in Anhui,
clutching his precious contract, and had procured the government’s red chop the same day.
‘The documents are all approved,’ said Shi. ‘When can I get the cash?’
The telephonic board meeting linking New York with China that night resulted in a display of pyrotechnics that would have impressed even the Chinese. Storms of protest burst
from the speakerphone in front of us. The other directors had never heard of the deal and Pat had sent the contract over to New York with a rather disingenuous attached note saying: ‘Here is
the conditional contract that I signed in Beijing for discussion tonight.’ After Rubel had read the contract, he was beside himself, spluttering with fury. ‘Why is it
conditional?’ he screamed. ‘Where is the conditionality? Where is it? Where is it?’ The shouts came out against a vague background noise of fists drumming on a boardroom table
some eleven thousand miles away.
Of course, the raging of the other directors could not change the facts. There was already a commitment to invest about twelve million within twenty-one days whether they liked it or not.
Eventually, exhausted by the force of their own remonstrations, they signed off. An uneasy truce was declared. Pat had broken the logjam and further investments followed quickly. It was a smart
move at the time but it did nothing long term for the relationship with our colleagues in New York.
On 8 September 1994 the twelve million dollars were wired into Shi’s bank account in Ningshan. Late that day, I took a long walk up to the Great Wall and stared out northwards towards
Mongolia over the ancient parapets. We had made our first investment. I felt exhausted, exhilarated and apprehensive all at the same time. It had been a bruising process. Would it all be worth
it?
Once the initial logjam had cleared and we’d figured our way through the bureaucracy, we were able to close other deals quickly. By the end of the year, we had invested
the whole of the hundred and fifty million dollars in seven factories all over China. In the following year, 1995, IHC raised a further two hundred and sixty million and we invested that into more
factories making components. We also used it to expand into another industry when we bought up three large breweries in Beijing. In the space of eighteen months, we had come from nowhere to be one
of the biggest financial investors in China, right at the height of the China boom. We were fast becoming the nexus between the vast capital resources on Wall Street and the greatest growth story
ever. Others had gone out and raised money, but no one had raised comparable amounts. Many of the funds that raised capital failed to invest it; their money was still parked uselessly in Hong Kong
years later. No one else had managed to invest so quickly. It looked as if Pat had created his machine for bringing money from Wall Street to China.