Authors: Tim Clissold
News started to trickle in about Shi’s rival business down the valley. Chang had driven past and told me that it was impressive, at least from the outside. It was much bigger than I had
feared and that convinced me that conflict was unavoidable. There was too much at stake for both sides. At the end of December, Chang had taken one of the cars from Zhongxi Village and driven up to
the gates of Shi’s new factory. The guards thought that they recognized the number plates and let him straight in. Chang had strolled around the workshops, asking the odd question, taking
detailed photographs of the machinery and production facilities and, after about fifteen minutes, he calmly drove off again, waving cheerily to the guards as he left. I couldn’t believe his
barefaced cheek. He might have been severely beaten if he had been caught. But we now had proof that Shi had broken the agreement that he had signed that he wouldn’t compete with us.
By this time, Chang was spoiling for a fight. He felt that some of the locals were using blocking tactics against him and he became testy. Just before Chinese New Year, I came down to the
factory to talk to the management team. On the way up to the factory, the driver complained almost continuously for the whole drive about what we had done to Shi. I told him that he didn’t
know the full facts and that I planned to talk to the whole workforce. But he said, ‘If you speak a thousand words it won’t be worth one from Old Shi!’ so I knew that it was going
to be tough.
Even so, we convened the meeting. I felt that the managers should be told directly why we had kicked Shi out and have a chance to ask questions. I tried to win them over but Chang was having
none of it. He launched into a monologue, his already huge voice amplified by a set of outlandish speakers that were hopelessly outsized for the small room. He bellowed, ‘I’m the
General Manager now, and I won’t tolerate anyone who won’t listen to what I say!’ As he started to list the various departments at fault, one man in the audience stood up and
started shouting back. Chang demolished him in the ensuing shouting match, called him into his office and sacked him on the spot.
The Chinese New Year holiday that year was an anxious time. I knew that Shi would not just go away, so we waited nervously for his first move. On 5 February he finally struck.
All 138 members of senior and middle management, except for eight people, left the business
en masse
and went down the valley to Shi. I received despairing calls from our people in the empty
offices. They couldn’t see how to carry on, but Chang seemed completely unperturbed. ‘We can get new people,’ he said. ‘I’ve still got my core managers and most of the
sales force has held. What we need is a morale booster.’
It was soon the fifteenth day after Chinese New Year, traditionally a time for fireworks. Chang did two things: he bulldozed the factory gates and ordered a colossal firework display. In China,
imposing gateways were still taken as a sign of wealth and social standing. Chang had described the gates of the factory as
tu-qi,
meaning ‘earthy’ or ‘peasant-ish’.
He was right; they were a bit shabby. It was strange that Shi had cared so little for the gates when he’d paid so much attention to the environment inside. Traditions were still strong in the
village and the demolition of the gates and the posters of the new ones had quite an effect. The firework display brought in from Shanghai was the largest the valley had ever seen and lasted nearly
forty minutes. Huge crowds came in from the surrounding countryside and gathered in a carnival atmosphere on the bridge across the river. The fireworks worked wonders for morale. Nerves were
steadied by Chang’s cool defiance of Shi, the local warlord, and several people returned up the valley.
Shi had clearly expected the business to collapse when he took out the management and had said so publicly. ‘One kick and the whole factory will come down,’ he had boasted, so the
survival of the business surprised everyone in the valley and by then we knew that Shi had problems of his own. We guessed that he had planned to bleed the joint venture for some time as his own
business grew, so when we kicked him out he lost a source of financing. There were rumours that he couldn’t make payroll in January. The atmosphere in Zhongxi changed. When the presses still
pressed and the mixers still mixed, there was a growing sense that we could win. One lad, who must have been worried about job security, said to me, ‘Your enemy is now a frozen snake.
Don’t let him thaw out.’
For weeks we tried to get the government in Ningshan to enforce the non-competition agreement, but that would mean squashing a successful self-made local and, on a more
practical basis, it could have meant more unemployment in this remote, underdeveloped and isolated region. After all, the dispute affected more than five thousand people. From the outside, the
Government appeared indifferent to our arguments but somehow, despite the tangled relationships and cross-allegiances inside the local Party, a consensus slowly emerged. Secretary Wu had exerted
enormous pressure on Shi to come to terms with us and, in early March, I was summoned to Ningshan.
Shi and I met, in an atmosphere of great tension, to try and straighten things out. Chang, Li Wei and I arrived early and were ushered up to the top of a building in the centre of Ningshan. As
we waited for Shi to arrive, I gazed out over the rooftops to the hills in the distance. It was a lovely spring morning, the air was warm and the hillsides in the distance had lost the tired look
of winter as the leaves began to unfold. Closer at hand, I could see the blue tiles on the roofs of the dormitories in Shi’s new factory. The layout of the trees and shrubs in the surrounding
gardens, and the rings of coloured stones at the roots of the trees were quite unmistakable.
* * *
Secretary Wu arrived with the Mayor and told us that they would both personally attend the discussions. This was a good sign because it meant that the government was anxious to
broker a settlement. Shi came in, looking nervous and irritable but during the discussions I could feel that his mind was still working very quickly. He peered at me over the table with a look of
intense concentration. Secretary Wu had explained privately that he thought we could persuade Shi to swap his new rubber factory for the old jack factory. We might have to make a balancing payment,
but it seemed like a sensible plan. We would end up with a bigger rubber business, free of the local competitor, and rid ourselves of the jack factory and the burden of its one thousand employees.
I hesitated in giving a firm reply, but it seemed like a perfect solution so I made positive noises.
On my return to Beijing, a sharp disagreement surfaced. I wanted to try to reach a deal with Shi and get rid of the jack factory. It was only useful as a currency exchange, but now we had
dollars. But Pat insisted that we needed the export volume; the jacks were being sold to America. I thought that there was no way to survive in the long term with such a simple product and I was
depressed when I lost the argument. I dutifully sent a note to Secretary Wu rejecting his proposal. Years later I heard that the news of this blunder had been greeted with gleeful incredulity in
the Shi camp. It enabled both Shi and the local government to say that they had tried their level best to achieve a compromise but that the foreigners would not come to terms. It was a very close
escape for Shi. We had let ‘the frozen snake’ thaw out. The local gossip was that we couldn’t have read Sunzi’s
Art of War.
We had opted for Sunzi’s worst
option: a long war of attrition on enemy ground. Round Two had gone to Old Shi.
About that time, we all had to troop back to the States for another quarterly board meeting. I knew that this one was going to be tough; the Board had set up an Advisory Committee and invited a
couple of retired business leaders to attend as expert advisers. It was another knee-jerk reaction from New York. ‘We have operating problems;
ergo
we need a couple of experienced
operators to tell our guys in China how to get it done.’
It sounded sensible on the surface, but these new advisers were veterans of multinational companies, a bit like highflying factory rats. One had ended up running a huge chemical factory in
Holland and the other had run HR for one of the biggest global companies on earth. I’m certain that they had been good at what they did; but at the board meetings, they naturally came up with
questions suited to running chemical factories or the personnel function of a well-oiled global business machine. They just couldn’t grasp that we weren’t in control and droned on about
installing ‘six-sigma’ quality controls and ‘constrained manufacturing’, whatever that was. At that stage I was more worried about making sure that the electricity
wasn’t cut off and the accounting records weren’t thrown into the furnaces in a factory where our most sophisticated HR strategy was to invite everyone to an enormous fireworks
party.
‘EBITDA’ became an obsession. It’s a kind of financial performance measure that tries to mix profits with cash flow, and we were tracking seriously behind
budget. The Advisory Committee wanted to know why and they weren’t impressed with the explanations. I didn’t think that there was any point in squeezing out the last drop of EBITDA from
a factory that was convulsed by a major battle between its shareholders. I wanted to keep the business stable and, in China, that meant keeping the workers busy even if we had short-term losses. If
production stopped, we would be finished; Shi would be the only option for the workers and they’d all move down the valley.
We were tracking behind in exports as well. Pat had come up with a hugely ambitious plan to increase exports to $22 million in that year and we were already hopelessly behind. The meeting became
acrimonious after one of the directors said that there was no point in messing around with Excel sheets and taking ‘a foolish stab at numbers.’ Pat countered by saying that he had to
maintain a sense of optimism and so we went round and round, in the same sort of circuitous arguments that I’d had in China, with the familiar frustration steadily rising on both sides. After
one session, again on exports, it got so bad that we were barely on speaking terms and there were long pauses in the board meetings as both sides glowered at each other or shuffled about with their
papers. Once, at the end of a prolonged argument about exports, one of the directors from the pension fund looked up at Pat and abruptly adjourned the meeting.
In a low voice full of menace, he said: ‘You wanna be Mr China,’ and after a deathly silence continued, ‘And Mr China ain’t gett’n it done in China!’
It was awful. Pat had looked deflated afterwards but tried to brush it off. He muttered that the director who made the remark was supportive behind the scenes but had to appear tough in front of
Rubel and the others from IHC. I was skeptical; it looked much more like the old Wall Street maxim coming out where, as they say, ‘You’re only ever as good as your last deal.’ It
didn’t matter how many successful deals Pat had done in earlier days. By then they needed a whipping-boy and it seemed to me that the other directors from IHC had conveniently erased the fact
that they too had spent months analysing China and doing due-diligence before we all made the joint decision to go out to raise the funds. I felt that, at that stage, there was no point in wasting
time in internal arguments that had nothing to do with the real problems in China. There wasn’t the time. We were at the key moment in the first struggle that we might actually win. We knew
what we had to do in China and we were out on our own.
Back in Ningshan, a storm had burst about Chang’s head that almost overwhelmed him. First a key delivery of raw materials disappeared. The rumour was that a truck from
Shi’s factory had secretly entered the docks in Shanghai at night. The Customs officials allowed them to load up eight tons of raw rubber that we were due to collect the next day. Chang
reacted quickly and airfreighted rubber from Malaysia. It was money well spent.
Shortly afterwards, there was a strike. It had been organized to coincide with one of my weekly visits in an attempt to embarrass Chang but he just walked into one of the workshops, picked
someone at random and told him that if he wasn’t back at work within ten minutes, he would fire the entire section. By the time I left, they were all back at work.
Three days later, the Deputy Mayor of Ningshan arrived with a posse of local policemen and, after several hours of stormy meetings, removed some key equipment. He claimed that it belonged to
Shi. We cobbled together a new workshop consisting of a series of simple drills and presses set up in a tent in the truck park. The makeshift facilities enabled us to limp on.
Next a hailstorm of writs hit the company. Shi had persuaded certain suppliers rumoured to be relatives of his wife to take court action to recover monies due from us. It felt as if I was back
in Zhuhai when the local courts issued freezing orders over our bank accounts even though we had been paying normally. I made what I thought was a threatening telephone call to one of the suppliers
in Shanghai accusing him of paying kickbacks but he just laughed and put the phone down. Chang quickly opened a number of undercover bank accounts outside Ningshan and diverted customer receipts,
so we managed to avoid the freezing orders.
After several orders were cancelled, we found that Shi had a warehouse in Shenzhen with a large store of faulty and defective goods. There were rumours that his people had taken defective goods
and packaged them in our boxes and shipped substandard goods to our customers, but it sounded rather far-fetched to me.
Back in the valley, the Village Committee stepped up its propaganda campaign. Chang was incensed by a pamphlet that Shi called ‘The Everlasting Beacon of Zhongxi’. The article had
all the overblown outmoded rhetoric of the Cultural Revolution, praising Shi to a degree that was both embarrassing and ridiculous. Some of the locals were taken in but I told Chang to forget it
and get back to work.
By late April, confidence was returning. We had started a recruitment drive at the local universities in Hefei and Hangzhou for graduates to be trained into management jobs. We had been quite
successful and around eighty students had signed up. A slow but steady trickle of people started to return up the valley. We had recovered our balance.