Mr. China (23 page)

As a final irony, Wang was arrested in the States several years later and convicted of some minor related offences. The last I heard, he was serving a prison sentence in California, but I was
told that when he gets out, he can’t be extradited to China because conviction of the theft of such a large amount carries the death sentence and the US considers the Chinese judicial system
to be unreliable. Who knows, he might even get to stay in America. The money was never found.

Wall Street’s theory of ‘private equity investment’, investing in private companies like we had done in China, was based on two principles. Firstly, that the
system of law and other controls are reasonably effective in dissuading business managers from helping themselves to the cash and secondly, that a management team will work hard over long periods
for clear incentives. Under these conditions, the theory goes, the management team can be left reasonably free to run the business and report to a Board of Directors that sets budgets and reviews
progress. We had applied this model in China – and it was obviously not working. Zhuhai taught us a lesson about the first assumption and I was starting to realize that the second was too
simplistic.

Pat’s world was dominated by the endless search for capital and, in the States, this was supposed to occur through open competition. But it wasn’t the same in China. Pat had a way of
looking at our factory directors that he often wrote about and mentioned in speeches. He’d talk about a ‘management gap’ in China. His analysis was that, after the founding of the
People’s Republic, China had essentially been closed to foreigners and there had been no true competition in the socialist economy. So managers in China had just been allocated capital and
told what to make. There had never been any pressure to respond to a market or develop new products. Capital was simply assigned to whoever worked their government networks most successfully. There
was no market regulation to funnel capital to the best managers and no pressure to perform. Once Deng took off the handcuffs, the natural Chinese entrepreneurs suddenly burst out into the open. The
problem, Pat thought, was that managers seemed to go to either extreme. ‘If the management is too bureaucratic, you can’t get anything done,’ he’d say, ‘But, on the
other hand, if they’re too entrepreneurial you can’t sleep at night. You may be in the components business one day and find that you are in the hotel business tomorrow.’ Or
gearboxes. Or smuggling.

It was true. Some of the factory directors were so stodgy that we couldn’t do anything with them. Early on, when we had tried to motivate them with increased salaries and a new bonus
system, I had found that many of the factory directors were actually reluctant to take the pay increase. During the salary negotiation with a certain Kang, who ran one of our businesses in a remote
country village in Sichuan, it felt as if our positions had been completely reversed. I started by offering him two hundred thousand
renminbi
a year, a big increase at the time, but he would
only take a hundred. I eventually bargained him up to one hundred and fifty. Then, when I wanted to backdate the rise to January, he wouldn’t take it. After about twenty minutes of arguing
around, we compromised on April. Living in an isolated factory up in the hills, Kang was unwilling to take a large salary rise. Everyone worked and lived together in the confines of the factory and
Kang was not ready to break the old established mould.

On the other hand, the more entrepreneurial managers were incredibly quick on their feet. Their thinking didn’t conform to a big picture; they were focused entirely on the short term. In
China, new businesses often sprang up and withered in a matter of months. There might be a shortage of some particular product so factories were built in mere weeks, often creating a glut that
caused many of them to fail. This short-termism might derive from there having been so much turmoil and reversal in China’s recent history, particularly during the Cultural Revolution. The
extreme degree of uncertainty about the future might motivate people to grab what they can while they can. It not only creates the Wang Jinwens, who may take your money while you’re not
looking, but also the Sus, who might erect a huge new gearbox factory without discussing it with anyone beforehand.

So it was true. Most of the factory directors were either wild men, or so stodgy that they drove us to distraction. In both cases, we weren’t really in control. We owned the controlling
stake in each business but we weren’t in control. Maybe we should have been firmer at the start, but by this time we just had to find some way of taking back the businesses, either by
establishing trust with the existing factory directors or by booting them out and replacing them with someone else we could rely on. We had tried that up in Harbin, and it had been an abysmal
failure. The next steps would require more caution, more intelligence, more guile.

And then, of course, there was the other side to contend with. As losses mounted, more and more impractical demands came beaming in from the States. Headcount reductions became
an obsession. Almost all Chinese state-owned businesses were heavily overmanned, but significant layoffs were virtually impossible. There was no social security, so what were these discarded people
supposed to do? But still there was a knee-jerk reaction to headcount figures. ‘Three thousand workers? Cut the payroll!’

I once received a note from one of our Chinese factory directors in the southern province of Hunan. Li was one of our best managers, a rare example of a factory director comfortably in the
middle of Pat’s management spectrum, and we trusted him. He had attempted to implement cautious workforce reductions at the factory and provide some continuing payments for those who had to
leave. But the message from Hunan told me that ‘Yesterday a worker arrived at the house of Mr Li with some bombing materials.’ Apparently a worker had strapped explosives to his chest
and had barged into Li’s flat at the factory while his family were eating lunch and threatened to blow the whole place up if Li made him redundant. There had been a standoff lasting four
hours, with police outside, but it had eventually been settled amicably and the worker had gone home. Our factory director was shattered and resigned from his post.

I heard afterwards that the police had not taken any action against the worker. Dynamite, apparently, was reasonably easily available because it was used to blast irrigation ditches in the
countryside and the authorities were terrified of provoking further unrest. Eventually, Li agreed to stay on, but there were no more workforce reductions. The episode was quite an education for me.
The lack of a government social security system and the years of reliance on the work unit in socialist China meant that real redundancy plans were almost impossible to implement and they raised
tough moral questions as well.

Nevertheless, I felt that the directors back in New York were starting to think that I was full of bullshit when I went through these types of difficulties. I sensed that they thought I was
throwing up roadblocks and making excuses for not getting things done. I began to think that it was only a matter of time before my own head would be on the block. One thing was clear: there
wasn’t much time.

So I went back to China in the spring of 1998. I knew that there were some heavy-duty fights ahead and I knew that they couldn’t be won with teams of lawyers sent in from
the States. Harbin had been a disaster; this time we would have to be less gentle and fight with more cunning. The stakes were high, but strangely I felt calmer about the prospect. The shock of
sudden illness had left me feeling that I should go back and do my damnedest, but if it didn’t work out, so be it. There were other more important things in life that I wasn’t prepared
to lose.

As soon as I got back to China, I went down to Ningshan to see Shi. After we made our first investment down there, he had proven to be extremely resourceful and the business
was our best performer. Shi had surprised us all at first when he managed to get the government chops so quickly after Pat signed the contract, but we soon got used to his energetic, buccaneering
style and since the business made money we left him to get on with it.

But on this trip to Ningshan, after a three-month absence, I was met by a group of agitated people. They looked nervously around and quickly drew me into a side doorway. In hushed voices, they
gave me lurid descriptions of a second factory that Shi was building some miles down the valley. They had heard that Shi had ordered a large batch of moulding machines. ‘That means that he
must be trying to set up in competition with us,’ they said darkly. ‘If you don’t stop it now, you’ll have a monster on your doorstep.’

Back in 1993, on my first trip to Ningshan, I had landed at Hangzhou airport in an old propeller plane in the drizzle and mist. Everything was grey, cold and damp. There
didn’t seem much point in visiting West Lake to take in the scenery, so we made straight for the mountains.

It was the first time that I had been to Anhui, but I knew that this landlocked inner province in central China had vast mountain areas surrounded by dense bamboo forests that were still
inaccessible by road. One of China’s holy mountains,
Huangshan,
the Yellow Mountain, was in Anhui. For a thousand years, it had inspired watercolours of rocky pinnacles with twisted
pines and peaks stretching high above the clouds in the valleys far below. Further north, the steep-sided hills and bamboo forests gave way to gentler slopes that rolled down towards the Yangtse.
The sixty million inhabitants of Anhui spoke with a thick accent, which was difficult to follow, but I had heard that they shared the northerners’ taste for good food and strong liquor and
never passed an opportunity for a party.

The tiny village of Zhongxi in Ningshan County sat high up in the mountains, miles from anywhere. At first the road to the factory crossed dreary flood plains, flat and monotonous, but gradually
the road approached the foothills and we wound our way upwards through rolling countryside. Tea bushes with stiff dark green leaves covered the hills in neat rows up to a certain altitude where,
over time, they gave way to lighter bamboo tints. As we climbed, the road deteriorated and the journey became slower. We frequently stopped to wait for local farmers to clear the road of huge piles
of bamboo. The hillsides became steeper and rockier and the valley sides closed in. It was a wilder landscape than I had seen the year before when we’d visited Che’s gearbox factory in
Sichuan.

After about four hours, on the brow of a hill, the driver stopped for a cigarette. It was the highest point and marked the border between the provinces of Anhui and Zhejiang. The sky had begun
to clear. We gazed down the stepped terracing in the valley in front of us. There was complete silence except for the sound of a man scraping about with his hoe some two hundred yards across the
valley. A little stream fell down over the rocks and stones as it made its way under ancient stone bridges. The air was clear and odourless, a relief after the smog of the city. In the surrounding
fields, I could see hundreds of winding paths worn flat by cloth shoes.

We got back into the car and followed the stream down to Thousand Autumns Pass where there was a little group of houses. The chimneys perched over the slanting tile roofs showed the faintest
traces of smoke. We drove on while scores of people laboriously planted and dug and sifted in the soil. The only signs of mechanization were the odd three-wheeled tractors hauling great loads of
rocks up the valley. At last, over the brow of a hill, through the thin mist, I could see a stone causeway and, beyond it, a little hamlet between the steep sides of the valley.

Zhongxi Village had maybe a hundred battered houses scattered around the stone road, a bank and a handful of shops. The buildings were basic. They looked damp and in a state of disrepair. The
pavements were clogged with debris and young men sat loafing about on broken old chairs, smoking and idly watching the world go by. In the centre of the scene was a group of buildings protected by
a high wall and with a large gateway facing the main road.

As we went through the factory gates the sun shone down on to a perfect lawn surrounded by a stone pavement swept spotlessly clean. Pots of brightly coloured flowers were arranged in rows and
circles. A short avenue of twisted ‘dragon-claw’ scholar trees led to a three-storey office building covered in white mosaic. The river flowed through the compound and, on the opposite
bank, behind another expanse of lawn, there was a huge factory building set about with cranes and scaffolding. The faint whirr of machines rose from the workshops closer at hand. The path between
the buildings was lined by rows of mature magnolias, almost in flower. Outside the workers’ dormitories, the gardens were divided by box hedges and there were miniature fruit trees dotted
about. At the base of each tree, concentric rings of little pebbles, probably taken from the river, had been sorted by colour. There were rings of grey, fawn and white. On that first trip back in
1993, I had wondered who was behind this patch of ordered neatness up in these distant hills and I soon discovered a story of epic struggle.