Authors: Tim Clissold
Ren looked like the perfect candidate: a Chinese with experience of international business, of turning around a loss-making brewery and establishing a new brand in China and who had a desire to
come back to the beer business. The issue fast became one of how to remove Lin and replace him with Ren. To do that, we needed Madame Wu’s agreement and I knew we’d never get that. I
saw no alternative other than to present her with a fait accompli so I drove over to the brewery.
I found Lin sitting dejectedly on the huge plastic sofa in his office. He guessed what was coming and took it cheerfully enough. The meeting lasted less than ten minutes. I explained that we had
found someone with experience of turning round a loss-making brewery and before I got into the details he interrupted to say, ‘
ni xiang rang wo zou de hua, wo mei yi jian
’
– ‘If what you are saying is that you want me to go, I have no objection.’ I set up a meeting with Madame Wu for the next day.
I steeled myself for the showdown. I took a suitcase full of defective bottles and cans of Five Star that we had found in the market place in case Madame Wu needed any further
convincing. It started off calmly enough, but we were soon back to the old form. She said that if we tried to manage the breweries it would be
yi ta hu tu
– ‘a whole mass of
confusion’. I pressed on. After another twenty minutes I was getting nowhere so I pulled out the suitcase. I took out a case of cans that we had found and placed them in a row on the
table.
‘Madame Wu,’ I said, ‘look at these.’
‘They’re fine,’ she snapped.
I opened the first one. Not a sound. Then the second. Not the slightest hiss. They were all completely flat. At the third, she said, ‘All right, all right, but if you lot were in control
it’d be even worse!’
‘Madame Wu,’ I said, ‘it cannot get worse. It is not possible. We are already at rock bottom. We are sending out flat beer that tastes like rotten vinegar packaged in beer
bottles with filthy old labels that say “Soy Sauce”. There hasn’t been “a whole mass of confusion” like this since the collapse of the Qing Dynasty. At least that was
presided over by an Empress Dowager with six-inch finger-nails who was carried around in a yellow sedan chair!’
Madame Wu raised her finger and opened her mouth. But then she shut it abruptly. After a few moments of glowering at me, she said, ‘
Xing le! Ni lai guan ba!’
–
‘Fine, you run it then!’ She agreed to meet with Ren.
Ren’s manner was smooth and assured and, as I had expected, it rubbed Madame Wu up the wrong way. But with Lin’s agreement to go she had little choice. Ren was appointed as General
Manager of the joint venture by unanimous resolution of the Board. Madame Wu extracted a concession: she became Chairman of the Board.
With Ren’s appointment as General Manager, a picture of complete and seemingly irretrievable chaos was brought into sharp focus. It seemed that Lin himself had enjoyed little control over
daily events. He had been new to Five Star and many of the people he had managed had strong relationships with his superiors at the Bureau. They could safely ignore his instructions without fearing
any serious consequences. The truth was that Lin had never been able to assert control. In this respect he had my sympathy. It was virtually impossible to control a state-run business from within
the system. What was needed was a complete outsider.
Ren realized immediately that drastic action was needed so he spent his first month recruiting new people, revamping the offices to build a sense of pride in the workplace and designing business
systems. The first few months went well and he collected about five million from overdue accounts. But there were things that Ren knew he had to do which would enrage the Chinese partner.
When he tightened controls over cash payments there were squeals of protest from all parts of the business. He had discovered that Factory Number Two had a substantial cash balance under their
own control outside of the records of the central accounts department: a ‘little gold warehouse’ as it was known in Chinese. The main accounts department knew about it (and several
others) but didn’t seem to mind that all over the factory there were cash balances outside their control. A thorough audit of the payments out of the ‘little gold warehouse’
showed that they were all related to the business and appeared perfectly reasonable. It was purely a matter of convenience; the employees just wanted to decide how to run their part of the business
independently. So, although there was no evidence that the money was being used wrongly, it nevertheless made the business hopelessly unresponsive to central management.
Ren tightened employee regulations with new rules specifying misdemeanours that would result in dismissal. No one had ever been fired from Five Star so the new rules came as a shock. Most of
them were recognizable in a Western context: dismissal for theft of company property, suspension for persistent lateness and so on, but some had been tailored to deal with the specific problems at
Five Star. These included a ban on making insurance claims on behalf of the company and then keeping the proceeds; organizing gambling syndicates in the office; growing vegetables for personal use
on the factory sites. Finally there was a new rule calling for dismissal for ‘fighting with customers’. Apparently there had been cases where point-of-sale girls promoting Five Star in
supermarkets around Beijing had set upon customers who complained about the quality.
I could believe it. Over the years I had seen several instances of customers being insulted by shop assistants, most notably in the Beijing Friendship Store where, during an altercation with a
customer over ice cream, a shop assistant threw a tub of it at the customer. Breaking free from the other shop assistants restraining her, she ran after the retreating customer and attempted to
give him an enormous kick up the backside before being dragged off behind the scenes by her colleagues. Now it seemed that Five Star’s customers faced a situation where if they drank the beer
they could end up with a mouthful of leaves and risk being assaulted if they complained about it.
Meanwhile, Pat was hell-bent on an export scheme to push Five Star in the States and had been spending months negotiating with a drinks distributor. There was a contrary argument that, since we
had such difficulties in selling our beer in the Beijing suburbs, concentrating on the home market might do us more good. But he persisted and signed an agreement with the distributor. Pat made a
big splash about the deal and appeared in a double-page spread in
Forbes Magazine
standing on Tiananmen Square near the Gateway of Heavenly Peace. For some reason the article was entitled
‘Mao’s Brew’. It took months to get the first shipment out of the factory and when it arrived in the States the distributor found that most of the bottle tops were rusty and that
some of the labels were on upside down. We never sold a cent and, about three months later, the distributor went bust so that was the end of that.
Back in Beijing, Ren was becoming more and more unpopular and I knew that Madame Wu was getting nettled. But there didn’t seem to be any alternative so I encouraged him to plough on. The
denouement in Ren’s attempts to restore discipline came when he finally tackled the accounts department. They were much too cosy, having worked together for years, and I had always been
nervous about their habit of providing elaborately confusing answers to the simplest questions. When Ren issued a notice reassigning thirteen accounts clerks to other parts of the factory it
provoked a rebellion and they barricaded themselves into the offices, refusing to come out. Aware that the factory was by now a tinderbox, Madame Wu arrived at the brewery. Fearing that the
situation might escalate now that Boadicea herself had arrived on the battlefield I went over as well.
As I turned down the corridor towards Ren’s office I could hear her raised voice – I could have heard it a hundred yards away. Ren was obviously getting a severe larruping. As I
walked in, she leant back in her chair and folded her arms, bristling with righteous fury. ‘I told you it’d be a complete mess if you lot got control,’ she said triumphantly,
‘and now we’ve got a right stir-fry of pubic hairs and garlic!’
Ren had arranged for Madame Wu to meet with the staff and I offered to go and support her. Surprisingly, she thought that would be a good idea.
I left several hours later, impressed with the way that Madame Wu had handled the situation. The accountants were in a state of high emotion, alternating between hysterical rage and sobbing,
complaining bitterly about Ren’s unfairness to them after their lifetimes’ devotion to the factory. She was calm but firm and extraordinarily patient as she listened to their
complaints. I realized that she was using the standard tactic of ‘talking them out’ just as Li Wei had done with the Union workers in Jingzhou; but I feared that this could be a
marathon session. At her request, I left after a couple of hours in the late afternoon but heard later that the accounts staff had finally agreed to the reassignment after Madame Wu stayed until
three in the morning listening to their outpourings of woe.
Over the coming months my role changed. Madame Wu and Ren became more and more disputatious and I became the buffer, adopting Lin’s role of former days. The state of the business, with
depleted cash, beleaguered markets and low morale, had provoked a real crisis that drew us together. Initially I really couldn’t handle her but after a while I grew to enjoy how impossible
she was. She was a class-act when angry and deep down, beneath the turbulent surface, I knew that she wanted Five Star to succeed even if she didn’t agree with our methods. Unfortunately,
there were strong undercurrents in the relationship between Ren and Madame Wu. They were both from Shanghai and were of a similar age, but Ren had left for Hong Kong and an American education. His
salary was astronomically high in comparison to her bureaucrat’s wage but he seemed to regard any of the petty perks that are the sole consolation for a Chinese offical as a type of
corruption. He detested the fawning and flattery that, as a senior official, Madame Wu received from her other factory managers. Madame Wu in turn resented Ren’s high-handed style of
management and felt that his capitalistic training had crushed out any real feeling for the ordinary workers. They were never able to get on.
The defining moment in Five Star’s crisis arrived early in Ren’s tenure as General Manager. Every year in China, exploding beer bottles seriously injure scores of
people, even killing one or two who bleed to death before help can arrive. The glass used in the bottles is of poor quality and thin patches in the bottles’ walls become weak after they are
thrown about in rough crates. Moreover, the bottles are reused many times and blasted with steam during the cleaning process. In the freezing Chinese winters, these extremes of temperature can
produce minute but dangerous cracks. So in early 1999 the Government decided to act and introduced new regulations requiring breweries to use ‘B-bottles’. These new bottles were much
stronger, made of robust glass and with a minimum thickness specified for the walls. They were also much more expensive. Nevertheless, the government directive was clear and notices were circulated
specifying heavy fines if the regulations were not observed.
Ren invested heavily in new B-bottles. I asked him how he would be able to collect the B-bottles back from customers rather than being fobbed off with old, obsolete stock but he said he could
address that with deposits from customers.
The new regulations were a disaster for Five Star. Except for a handful of foreign-invested breweries, every other brewery in China – including Yanjing, which had the Beijing Government as
a big shareholder – refused point-blank to implement the new regulations and continued using the old bottles. The authorities made a halfhearted attempt to enforce the rules by raising fines
but the breweries refused to pay since everyone else was also breaking the rules.
Faced with the prospect of trying to fine the entire domestic beer industry, the Government retreated and business went back to normal. Customers demanded back their deposits and our precious
B-bottles disappeared into a sea of broken glass. Within a few weeks, we had lost over 90 per cent of the new bottle stock and, together with it, the cash investment that we had made. Market share
continued downwards and with loans already standing at several hundreds of millions of
renminbi
the banks withdrew any further support. Morale at the factory was at rock bottom and key
managers were leaving. By this time, it was obvious that Five Star’s condition was terminal and, faced with this unpleasant reality, the Board decided to dispose of the business.
I was given the job of selling it.
After the euphoria of the earlier years, an ugly mood had settled over the beer industry. The newspapers dubbed it ‘the biggest bar-room brawl in history.’ More
than a billion dollars had poured into the Chinese brewing industry in the three years to 1996 and the capacity at the high end of the market far outstripped demand. Foreign brewers realized that
they had hopelessly over-invested but when they tried to tap into the medium-level market where demand was stronger they faced vicious price wars.
Hundreds of the smaller inefficient local breweries across China were virtually bankrupt but local governments, anxious about unemployment, kept bailing them out. These dying breweries churned
out beer at or below cost and dragged down pricing in the whole market. It was quite impossible for any foreign brewer to make money at any level since local protectionism, creaking distribution
systems and conservative consumer buying habits meant that foreign brands failed to achieve any credible market share. The cold winds of reality about the Chinese beer market started to blow
through boardrooms all over the world and, one by one, the foreign brewers fled, scrambling out of China with the same haste that they had shown in getting in.
Fosters bailed out first at a fraction of their original cost, followed closely by Bass. Carlsberg and Asahi followed suit, selling their businesses to local brewers. Becks got embroiled in a
trade-mark dispute and the others were caught with no exit and facing years of operating losses. In this environment, the prospects for selling Five Star were bleak indeed. Nevertheless, I found
introductions to the top managers of most of the multinational brewers in China to see if any of them might take on Five Star, but not one of them returned my phone calls. The only alternative was
to look for buyers inside China.