Last week, I asked readers to help kick off this new series on the China gold rush by sending me suggestions, contacts, and stories. I am grateful for and startled by the quality of the response. I am sorry I have not yet had time to thank each writer individually.
As I started thinking about China, I asked myself what the possible ways are to make money doing business there, and I decided to write today about what seems to be the most obvious one: direct investment—that is, buying or starting China-based businesses. The country’s cities, valleys, and hillsides are strewn with decaying factories and idle workers, relics of the failed central-planning experiment, and global markets are hungry for the fruits of low-cost production. So if one just finds an undercapitalized factory and adds some management expertise …
Ah, the dream world. I assumed direct investment might be easy money until I picked up Mr. China, one of the 17 China business books piled up in my study. A memoir written by the former president of ASIMCO, one of the first big China funds, Mr. China describes in hilarious detail what happened when the author bought a bunch of Chinese auto-parts factories. The book suggests that the direct-investment strategy is, if not a complete hallucination, close.
Author Tim Clissold first visited China in 1988, while working as an accountant in London. Captivated, he quit his job and moved to Beijing, where the hazards of the planned economy quickly became clear: The government set the price of cabbages too high that year, encouraging farmers to grow little else, and the city soon filled with massive piles of rotting produce. Clissold finished his studies in 1992, the year Deng Xiaoping turbocharged economic reform by saying, “To get rich is glorious.”
Clissold joined forces with an ex-Wall Street boss named Jack Perkowski and an ex-Red Guard in the Ministry of Foreign Investment named Ai Jian. The trio visited an endless series of government ministries in search of opportunity: “iron and steel, telecommunications, paper, electronics, chemicals, rubber, building materials, float glass, cement, light industry, power generation, even aircraft maintenance.” The usual practice was to diversify risk by investing in multiple industries, but Perkowski and Clissold decided to focus primarily on auto parts. Over the course of nine months, they visited 100-odd component factories in 40 cities, looking for deals.
In China, as elsewhere, it’s usually not what you know, but who you know, and the players were factory bosses, municipal bureaucrats, and party officials. The courting ritual often began with a banquet, such as the one thrown for Clissold and Perkowski by the mayor of Changchun. The festivities were fueled by baijiu, a liquor that, from Clissold’s description, is not far removed from diesel fuel.
The goal of the Chinese banquet is “to impress,” and this is accomplished by serving bizarre animal parts. At the Changchun banquet, as the baijiu flowed, Clissold and Perkowski were treated (hazed?) with duck webs, cow’s lung, goose stomach, fish lips, goat’s tendons, ox’s forehead, tortoise casserole, steamed rabbit ears, duck’s tongues, black scorpions, and deer penis. The Changchun deal blew up, but others didn’t, and over the next few years, ASIMCO invested $400 million in about 20 Chinese factories. Then the real fun began.
There was Pang, the factory boss in Harbin, who was fired but wouldn’t leave. Instead, he just squatted in his office and continued giving orders, telling workers to choose between “the factory and the foreigners.” Pang couldn’t be physically dragged out because he was the chairman of ASIMCO’s joint-venture partner, so the business imploded.
There was Wang, the manager of a brake-pad factory in Zhuhai, who disappeared after attending a trade show in Las Vegas. The first theory was that he had been mugged or killed, but then someone noticed the missing $5 million. The chief of the Zhuhai anticorruption bureau was willing to investigate—if ASIMCO gave him some cash and a car. A Beijing court deemed the case “confusing” and held ASIMCO liable for all losses and costs.
There was the drunken argument at a “picnic” on the grasslands of Mongolia, in which a translator sliced off a factory director’s ear. There were the irate investors in New York, forever screaming through speakerphones, demanding that managers be sacked and the staggering cash bleed controlled. There was the faux pas at the Beijing brewery, when ASIMCO went over the head of the local bureaucrat, Madame Wu, and schmoozed some ministry bigwigs instead. ASIMCO won the deal and invested $60 million—only to discover that, a few days later, about $2 million remained. (The vanishing $58 million temporarily overshadowed the brewery’s quality control problems: When the cheap glass bottles weren’t exploding in the markets of Beijing and maiming or killing people, they were often filled with only an inch of beer, or an inch of leaves, or, in one case, a ball of adhesive tape.) After soothing the jilted Madame Wu and trying but failing to fix the business, ASIMCO unloaded the wreckage on Tsingtao.
After eight years in China, Clissold was waylaid by a “weird viral attack that had inundated my heart and liver and gotten into my joints.” The doctors misdiagnosed the symptoms as a heart attack and attributed it to stress.
The near-death experience gave Clissold a chance to think, and his first thought, not surprisingly, was to quit. Then, he decided that he would instead “find a Chinese solution to a Chinese problem.” China, he concluded,
was a society that had no rules—or, more accurately, plenty of rules that were seldom enforced. China seemed to be run by masterful showmen: appearances mattered more than substance, rules were there to be distorted, and success came through outfacing an opponent. … One thing was for sure: if you played by the rules, you were finished.
At the time Clissold collapsed, the fund was on track to lose everything. After another few years of effort, he and his partners salvaged about half of the original investment, and ASIMCO, still run by Perkowski, evolved into China’s major auto-components supplier. (Clissold eventually took refuge at Goldman Sachs.)
So the lesson, perhaps, is that success in Chinese direct investment requires decades of commitment, deep government relationships, and superhuman effort. New regulations allow total foreign ownership in some industries, thus reducing the use of joint ventures, which Clissold describes as “incredibly difficult to manage because Chinese and Westerners don’t think in the same way.” The structural advantage of total ownership, however, is probably offset by the fact that, after 15 years and billions of dollars of capital, the low-hanging fruit is probably gone. There’s no easy money left, and it wasn’t that easy to begin with.