Mr. China (37 page)

The two top brewers in China were Tsingtao and Yanjing. They each produced about a million tons of beer a year and were locked in a bitter struggle for the number one slot,
using different statistics to show that they were the largest. Both companies had gone public on Chinese stock exchanges so they had plenty of cash and started making cautious plans to buy up
breweries in other parts of China. Tsingtao bought a brewery in the western city of Xi’an and another on the banks of the Yangtse at Yangzhou. Yanjing ventured further south with an
acquisition in Hengyang. But these were all timid first investments in Chinese-owned businesses and neither had attempted to purchase a large brewery from a foreigner. However, there weren’t
many options, so I arranged a visit to Tsingtao.

The Tsingtao Brewery was the first PRC company ever to raise capital on Hong Kong’s stock market when, in 1993, it netted an equivalent of sixty-five million bucks. Shortly afterwards it
came out that Tsingtao’s management had taken the cash and, instead of investing it in the brewery as they had promised, had lent it to their friends – who happened to be property
developers. Investors were outraged but there was little that they could do as the management retreated to Tsingtao and ignored the furore. However, the Central Government was embarrassed by the
scandal and eventually the Tsingtao Municipal Government kicked out the old management team.

The episode had a lasting effect on the town. On the northern side of a little peninsula that juts out into the sea, across from the old town of Tsingtao with its quaint German architecture,
stands a vast new city centre. A cluster of glass skyscrapers has sprung up on the farmland and, across a well-appointed plaza with fountains and palm trees, the palatial offices of the Local
Government, crowned with the red emblem of the People’s Republic of China, stare magisterially out to sea.

The man who was brought in by the Government to restore the Tsingtao Brewery’s tattered reputation was called Peng Zuoyi. I went to Tsingtao in the early autumn and spent an hour with him.
Short, pugnacious, able and down to earth, Peng reminded me of Old Shi down in Ningshan. He had the same easy manner and charisma, combined with a quick mind and the inclination to make decisions.
Above all he gave the impression that he was on top of his business and that he was enjoying it immensely.

I was cautious at the first meeting but my hopes leapt inside me when he said that he had thought of contacting us but that he ‘knew that we wouldn’t be interested in selling a
majority of Five Star’. Thinking inwardly that he’d be welcome to the lot, I hinted that there might be some flexibility. He took the lead and the discussions progressed over the coming
weeks, quickly moving on to substantive negotiations.

Meanwhile, through the autumn, Five Star lurched from one crisis to the next. After the banks withdrew support, cash quickly ran out and payment of wages became delayed. Inevitably, the
desperate state of the business became clear to Tsingtao and they suspended negotiations. Madame Wu and I agreed that whatever happened we had to keep the business going; if it collapsed, Tsingtao
would just wait on the sidelines until we were so desparate that we’d sell at any price. A war of nerves began.

A few weeks later the first blow fell in the form of a writ from one of Five Star’s main suppliers who were suing for payment of overdue accounts. It was from the Tsingtao Can Company,
which seemed more than a coincidence to me. The news quickly spread and several other suppliers decided to get in on the act. I was in New York at the time and just before I stood up in front of
the Board to run through the progress with Tsingtao I was handed a piece of paper. It said that Ren had resigned, the joint venture’s assets had been frozen by Court Orders, production had
stopped, the Chinese partner had withdrawn the rights to use the Five Star trade mark, the banks had called their loans and the Beijing Environmental Bureau had issued an order to close down
Factory Number One.

As soon as I got back to China I went to see Madame Wu. Faced with such a dire situation, and with Ren now gone, the quarrels swiftly became a thing of the past. We had to
restart the business so we focused on the few remaining customers who were paying their bills and the handful of suppliers who would still give us credit. For four months we ducked and weaved,
hopping around suppliers and bailiffs as they pursued us from bank to bank. Whenever we were tipped off that a new freezing order might have been issued we rushed to the bank, took the remaining
cash and hid it in a new account out of the reaches of the Court officials. The Court then went back to issue a new search order and, if they found any new accounts, they’d come out with
another freezing order, so we’d hurry off to the bank and move the cash on. Payment of wages got later and later, but that was nothing unusual for China and the workforce remained stable.

For four months we lived on a knife-edge expecting collapse at any moment, but for the first time we were the beneficiaries of the chaotic legal system: the Court orders proved too impractical
to implement. We managed to restart the fermenters and Tsingtao realized that the business would not collapse. By May we were back at the negotiating table.

Two months later the contracts were ready and Tsingtao invited two hundred journalists to a signing ceremony in Beijing. The ordeal was still not over and Tsingtao’s lawyer demanded
several late concessions. We refused point-blank and the journalists were kept waiting for two and a half hours as we haggled in a back room. Finally, Peng and I signed the deal. The relief was
intense. We had retrieved more than twenty million dollars from the wreckage. Our Board was amazed by the price but I was just happy that it was all over. The arguments with Madame Wu had finally
come to an end. The
Financial Times
summed it up when it reported the event. Asked how I felt about the whole Five Star experience, I had been lost for words.

‘Not thrilled,’ was all I could manage.

The three struggles with Old Shi, Chen Haijing and Madame Wu all came to a resolution at about the same time. These main battles had been rumbling along during the same period
together with smaller skirmishes elsewhere. In the end, during those three years, we replaced fifteen out of the original seventeen Chinese factory directors; almost a clean sweep. Sometimes we had
to do it more than once when our first choice didn’t work out. And each fight was different: some took a couple of meetings with a bit of straight talking, but not many were so clear-cut.
Most needed months, maybe a year, of laborious, convoluted negotiations which often came to nothing; then, and only then, if patience failed us completely, would we resort to the pitched
battles.

Booting out the factory directors affected the company’s results almost immediately. In our worst year, when the battles were at their height, we reported losses of about forty million; a
few years on, and the company was making profits of nearly twenty million and it was churning out cash. Of course, the turnaround was helped by some other factors: we were lucky with the market and
Michael eventually figured out a system of proper incentives for the new Chinese managers. But if we hadn’t hurled out the original Chinese factory directors, it would all have come to
nothing. Even with the turnaround, according to Wall Street’s equations the whole endeavour had failed dismally; the hole we had made for ourselves in the earlier years was too deep and the
investors lost a lot of money. But on a human level it had been the ultimate turnaround in China, one that ultimately saved thousands of jobs. Somehow it had happened. Our iron tree finally
blossomed.

The turnaround was better news for the investors but for me, sadly, it was a paradox. There were no more battles to fight; no more deals to win; no more sieges to plan. I realized that I had
worked myself out of a job.

As I started thinking about what to do next, I knew that we were anything but an isolated case in the combat zone of Chinese investment; the whole business landscape was littered with the wrecks
of failed joint ventures. Ten years after we had first raised the money hardly anyone did joint ventures any more. Even Pat had learnt a little humility; he developed a habit of describing China as
‘the Vietnam War of American business.’ Most of the big multinationals set up their own wholly owned companies unless the Government threw up restrictions. All but the most innocent of
newcomers had concluded that joint ventures were just too hard to be worth it. And of the billions already invested, much of it was languishing in dysfunctional joint ventures entangled in all
those familiar circuitous cross purposes where no one was in control.

The experience at Five Star had shown that, with careful handling, considerable value could still be extracted from the most dire of situations in China. Five Star had been utterly bankrupt by
any customary standards of business: wages were four months late, the bank had called in the loans and we had been pursued from bank to bank by Court officials with freezing orders for months on
end. When I called around to talk to the multinational brewing companies to see if they might be interested in Five Star, I knew in my heart that buying the business would make no sense for them.
So I hadn’t been surprised that no one had returned my phone calls.

And yet Tsingtao had paid more than twenty million dollars for a share in the breweries, offshore and in hard currency. It made no sense in a conventional business context – but it was
worth it for Tsingtao. They had raised plenty of capital on the stock exchanges in Hong Kong and Shenzhen so cash was no problem. Moreover, local investors still seemed so keen on buying up shares
that Tsingtao’s stock was trading high and their shareholders appeared relatively unconcerned with short-term profits. Paradoxically, that meant that Tsingtao’s management could take
the long-term view and try to buy up market share in China.

Acquiring the Five Star breweries enabled Tsingtao to establish a strong foothold in a major market in China without the pressure for short-term returns. They were building market share to the
stage where they could reach economies of scale and, as Pat had said years earlier at that dinner with the Mayor of Changchun, ‘take out the opposition.’ It was an irony that he had
been right that Chinese industries would inevitably consolidate along lines that would seem familiar to a student of American history. It was just that the consolidators were Chinese and not from
Wall Street.

The same process of industrial consolidation was happening in the components industry. One spark-plug factory in Hunan, which I had visited eight years earlier, had grown from a small company
about the same size as our business in Jingzhou into a large multiproduct group that was bigger than all of our seventeen businesses put together, just in the space of eight years. It had managed
to get money from the stock exchange and buy up several larger companies that were exporting components to America. At one stage it expressed an interest in buying some of our businesses. Although
it might have got money back to the investors, Pat would have none of it. Selling out to more flexible and quick-footed Chinese was something that wasn’t in the original plan; it was
something that simply could not be accommodated within his view of the world. But with plenty of well-funded Chinese companies out looking for businesses to buy, and the huge stock of dysfunctional
joint ventures like Five Star all across the country, I felt that there might be an opportunity to put the two together and recover value. So I parted company with Pat and went out to look for
opportunities to extract value from difficult situations.

As China moved into the new millennium, it became obvious that the minor mishap with a few hundred billion dollars of foreign investment during the 1990s was dwarfed by the
problems of China’s domestic banking system, which is a cock-up of truly astronomical proportions. Buried under a mountain of non-performing loans or ‘NPLs’ left behind by the
state planners, the banks were struggling with bad debts that some economists estimate to be the equivalent of seven hundred billion dollars. But even there, in those most dire of situations, which
the financiers rather coyly called ‘distressed’, I became convinced that some value could be recovered, that some of the ‘distressed’ businesses could somehow be
resuscitated and given some hope. So I ended up wading into the new morass of the Chinese NPL market to see what I could find.

It was only after I left the company and emerged blinking into the sunlight that I realized how completely out of touch I had become. I was so preoccupied with the battles that
I had failed to see what had been going on all around me. I quickly realized that where one iron tree had blossomed for us it was as if a whole forest had burst into flower along the Chinese coast.
Everything had changed in those ten short years; there had been a seismic shift in the economy. China began to generate its own cash from the stock exchanges in Shanghai and Shenzhen.