Succession Challenges in Chinese Enterprises

Recently, the Chairman of Metersbonwe, Hu Jiajia, resigned from her position, prompting the return of her father, Zhou Chengjian, the company’s founder, to the board. Similarly, after stepping down as Chairman of Suning.com for two and a half years, Zhang Jindong re-emerged as Chairman of Suning Holdings Group, setting a goal for Suning.com to achieve profitability in the new year.

In recent years, news of company founders returning to the helm has become increasingly common. Examples include Richard Liu of JD.com, Huang Guangyu of Gome, Tang Yan of Momo, Zheng Yaonan of Urban Revivo, He Guangqi of Haidilao, Ma Mingzhe of Ping An Group, and Fu Qiang of Aiways.

This phenomenon isn’t unique to China. Internationally, we’ve seen similar instances, such as Howard Schultz’s third return to Starbucks, Robert Iger’s comeback at Disney, and Sergey Brin’s re-engagement in Google’s AI endeavors.

A few years ago, successful founder succession was rare. Data from Wind in 2019 indicated that among over 3,600 listed company chairpersons, individuals born in the 1950s and 1960s, predominantly company founders, represented more than 60%. This suggests that most enterprises were still under the management of their founders, with a lack of transition to the “second generation.”

The wave of “founder comebacks” brings these first-generation leaders back into the forefront, highlighting two key issues. First, the intense pressure of competition and development in businesses, and second, the considerable difficulty in achieving a successful transition of leadership. In critical times, founders are often compelled to return as the company’s “savior.”

However, the forced return of a founder often signals a critical moment of survival for the company. Opportunities that could have been seized by previous successors might have been missed, and the original values and vision of the company might be shattered. Even with the founder’s return, salvaging the situation might be challenging.

Since the economic reforms of 1978, which allowed citizens of the People’s Republic of China to establish private businesses, China’s first generation of private enterprises might now have a history of 46 years. These enterprises, many over half a century old, are facing the daunting task of finding successors as their founders approach retirement.

The Return of the Founders: A Tale of Business Titans in China

In the last few years, there has been a notable trend of company founders, mostly born in the ’50s, ’60s, and ’70s, coming out of retirement to retake active roles in their businesses. Even retired moguls like Wang Shi, Shi Yuzhu, and Jack Ma continue to wield significant influence within their companies, shaping their paths either directly or indirectly.

However, a shift is observable among the younger generation of entrepreneurs, particularly those born in the ’80s. Figures like Colin Huang of Pinduoduo, Zhang Yiming of ByteDance, Cai Haoyu of miHoYo, and Su Hua of Kuaishou have opted to step back from the forefront in their prime years.

The ’90s and ’00s generations, while emerging, don’t yet match the renown and impact of their predecessors. On the 2023 Hurun Rich List, with personal wealth exceeding 5 billion yuan, they account for just 1.5% of the total listees (1,241 individuals). The only notable names from this cohort are Nie Yunchen, founder of HeyTea, and the infamous Dai Wei of the beleaguered bike-sharing company, ofo.

In contrast, older generations, like Ren Zhengfei, Zong Qinghou, Wang Jianlin, Dong Mingzhu, Yu Minhong, Zhang Chaoyang, and Lei Jun, who have amassed more personal wealth and remain hot topics, dominate the current landscape of Chinese entrepreneurs.

This scenario underscores a trend: either the older generation is returning, or they are refusing to fully retire, highlighting the challenge of finding and smoothly transitioning to suitable successors.

However, the general sentiment towards founder comebacks has been positive. Industry insiders have expressed that having a stalwart figure, akin to a “pillar of heaven or a beam across the sea,” is crucial amidst the volatile business landscape. The boldness, vision, and experience of these battle-hardened entrepreneurs are invaluable.

This sentiment is mirrored in the stock market’s reaction to rumors of a founder’s return. For instance, the stocks of Gome surged dramatically whenever there were whispers about Huang Guangyu’s release from prison.

One striking example occurred in 2020, when rumors of Huang Guangyu’s release led to a 65% surge in Gome Finance Technology’s stock price, with similar leaps in other related stocks, leaving the market astounded.

Regrettably, Huang’s return did not spark a miraculous turnaround for Gome. His bold declaration to restore the company’s market position within 18 months remained unfulfilled, replaced by massive layoffs and store closures, amid rumors of the Huang couple seeking to cash out.

Huang Guangyu and Gome’s failure signify the challenges traditional enterprises face in adapting to the new era. Unlike the more agile internet companies, these traditional firms, which most returning founders belong to, struggle to pivot swiftly in response to rapid market changes. Zhang Jindong, who recently returned to Suning.com, experienced this firsthand, acknowledging the catch-22 of digital transformation: “To transform is to court death, not to transform is to wait for it. Suning would rather seek rebirth in this struggle than sit and wait for the end.”

While the outcome remains uncertain, Zhang, upon his return, has expressed confidence in the company’s resilience and growth potential, aiming for a significant comeback in 2024.

Notably, Zhang’s strategy includes a greater emphasis on talent development, particularly nurturing young talents, echoing Wu Yongming’s push for team rejuvenation after taking over as CEO of Alibaba.

These business leaders are acutely aware that the future belongs to the younger generation. Yet, in the current climate where rejuvenating the management team remains a challenge, they recognize that it’s up to them to navigate their enterprises through these perilous times.

The Uncertain Retirement of Chinese Entrepreneurs

The backbone of China’s entrepreneurial community is still the generation born in the 1960s, reflecting a sentiment in the industry that “Chinese entrepreneurs of this generation don’t have the luxury of retirement. They treat their businesses like their own children, unable to let go.”

Take Alibaba, which has recently seen frequent personnel changes. Even though Jack Ma expressed a desire to retire and “die on the beach, not in the office,” enjoying the sun, he led a relatively low-profile life post-retirement. However, with the rise of formidable competitors like Pinduoduo and Douyin’s e-commerce platform, Ma couldn’t remain detached. He has been involved in Alibaba’s organization restructuring over the past year, offering encouragement on the company’s internal network.

Joe Tsai, considered Alibaba’s second-in-command, has also stepped back into the limelight from his business ventures in the United States, returning alongside fellow “Alibaba Partnership” member Wu Yongming.

This succession is seen as another successful implementation of the partnership model. Although Ma once said, “Professional managers aren’t for me; I trust my partners,” the partnership model is essentially a variant of the professional manager system, which is a common mode of business succession.

Ma’s rejection of the professional manager model is partly because “professional managers don’t know how to please customers, they only know how to please their bosses.” This short-termism, characterized by sycophancy and neglect of long-term goals, starkly contradicts what most businesses strive for.

However, the professional manager model has seen success in China. For instance, He Xiangjian of Midea smoothly transitioned his company to Fang Hongbo in 2012, creating an exemplary story in the industry. Wang Jianlin of Wanda Group, still active in business, has also expressed his approval of this model: “If I think my son is capable, I’ll pass it to him; if not, I’ll let him be a shareholder and hand it over to a professional manager. There’s no issue with that.”

It’s worth noting that besides the most common succession method of familial handover, the second most common isn’t purely the professional manager model or Ma’s modified partnership model, but rather an internal cultivation approach.

Whether it’s Ren Jun succeeding Zhang Jindong, Wang Li succeeding Tang Yan, or Xu Lei succeeding Richard Liu, these internally groomed successors, despite their lackluster performances leading to founders’ returns, have contributed significantly to their companies’ futures, like Yu Liang succeeding Wang Shi and Zhang Dong succeeding Shi Yuzhu.

However, in China’s existing private enterprises, family businesses account for 80%. Influenced by traditional familial values, hereditary succession naturally becomes the mainstream method, especially in businesses founded by the older generation.

Examples abound: Tao Huabi of Lao Gan Ma, Zhu Yicai of Yurun, Zhou Chengjian of Metersbonwe, Zong Qinghou of Wahaha, Mao Lixiang of Fotile, Lu Guanqiu of Wanxiang, and Liu Yonghao of New Hope, have all chosen family succession.

In the case of Zhu Yicai, like Huang Guangyu, his situation involves external intervention, which we won’t discuss here. The cases of Tao Huabi and Zhou Chengjian, who returned to their businesses, are slightly different.

For instance, Zhou Chengjian’s shorter retirement period saw Metersbonwe already in decline before he stepped back. In contrast, Lao Gan Ma was flourishing before Tao Huabi’s retirement. Unfortunately, Zhou Chengjian’s exit, effectively leaving a mess for his daughter, hasn’t solved Metersbonwe’s crisis, necessitating his return to shoulder the company’s growth challenges.

Metersbonwe still needs more time to recover. Considering Tao Huabi’s longer return but still not being able to reverse the situation, the reality appears even more daunting than imagined.

The Grim Reality Hard to Reverse

Tao Huabi, founder of the national brand Lao Gan Ma, is undoubtedly a remarkable representative of the older generation of entrepreneurs. Her entrepreneurial journey is legendary, a common theme among her peers. However, this accumulated ‘legendary’ status can sometimes bestow a kind of ‘divinity’ upon the entrepreneurs themselves. When Tao’s portrait became the trademark of Lao Gan Ma, the brand, in a sense, became inseparably hers, overshadowing whoever might be in charge.

From a corporate perspective, the founder’s halo effect can be beneficial. If leveraged properly, the brand’s intellectual property value can be immensely potent. However, for the second generation of business leaders, especially those eager to make their mark and establish their own credibility, this halo can be a heavy burden.

A joint survey by Hui Valley Family and Deloitte found that only 20% of the ‘rich second generation’ are willing to take over the family business, with over 40% resistant to the idea, and 30% preferring to start their own ventures.

He Xiangjian, whom we mentioned earlier, willingly handed over his company to professional manager Fang Hongbo, partly because his only son He Jianfeng was determined to start his own business, rather than take over the family enterprise.

Unlike He Xiangjian, Tao Huabi did not focus much on succession planning. According to her arrangement, her eldest son Li Guishan was responsible for sales, while her second son Li Miaohang took care of production. Both brothers had their own roles, but unfortunately, Li Guishan’s investment ventures, which went against Tao’s explicit advice, led to a significant scandal in 2015, forcing Tao to publicly disassociate these actions from Lao Gan Ma.

If Li Guishan damaged Lao Gan Ma’s reputation, then Li Miaohang hurt its substance. Eager to make a mark, he replaced the original Guizhou chili with cheaper Henan chili, reducing costs but also leading to a loss of customers due to the change in flavor. The company also faced several crises, including recipe leaks, factory fires, and failed marketing campaigns. Lao Gan Ma, once thriving, found itself in a growth dilemma.

Similar challenges, irrespective of succession methods, were prevalent among businesses even before the founders returned. Take Beiyingmei, a traditional enterprise like Lao Gan Ma. In the seven years following founder Xie Hong’s retirement, the company changed CEOs three times, partly due to internal strife and interference from Xie and his family.

Zhu Deyu, Beiyingmei’s first CEO post-Xie, focused on diversifying the company’s portfolio. However, his departure after just nine months and the subsequent focus of his successors on the core dairy business highlight the pitfalls of hasty diversification.

Frequent changes in strategy and leadership cost Beiyingmei valuable time. The company’s approach of transferring operational pressures to downstream distributors is reminiscent of Li Miaohang’s cost-shifting to consumers, with predictable results.

A similar pattern emerged in the internet company Momo. Wang Li, Tang Yan’s partner and successor, lacked passion for the core business and focused on new ventures. The dismal results eventually forced Tang Yan to make the same decision as Tao Huabi and Xie Hong – a return to leadership.

The outcomes of these founder comebacks have mostly been disappointing, with companies longing for a ‘savior’ to lead them out of difficulty. However, the romantic notion of a savior is, in reality, a precarious gamble. While winners leave an inspiring legacy, losers face a harsh reality.

Facing this harsh reality, Zheng Yaonan, founder of Urban Revivo, emphasized the importance of “second entrepreneurship” before his return. He believed that “a business reaches a point where it faces fluctuations, and to navigate through, one must embrace the spirit of second entrepreneurship. Innovation is the soul of an entrepreneur, the core of the entrepreneurial spirit, and a successful entrepreneur should always possess this spirit.”

A Quixotic Charge? The Complexities of Second Entrepreneurship

In recent years, the concept of ‘second entrepreneurship’ has been increasingly mentioned and recognized by more and more entrepreneurs. However, it’s easier said than done, especially for seasoned entrepreneurs like Zheng Yaonan who, despite understanding its importance, struggle against the unpredictable market forces. The adage “it’s hard to turn a big ship around” aptly describes the unique challenges of second entrepreneurship, which significantly differ from the initial startup phase.

Scholars have emphasized the interdependence of entrepreneurial activity, market prosperity, and the deepening of market economies. In the era when these older entrepreneurs were at their peak, the primary task was to seize the opportunities brought by reform and opening up.

Indeed, during the post-reform era’s vast opportunities, simply capturing the zeitgeist was enough to move from zero to one, scaling businesses considerably. However, establishing a niche in today’s market, which is far more competitive and settled, is a different story altogether.

The global economic downturn has left traditional businesses in a bind, with no apparent tailwinds or low-hanging fruits to capture. This dire situation has led to the rise of the concept of second entrepreneurship, driven by sheer necessity for survival.

However, the challenge lies in the fact that second entrepreneurship typically comes many years after the first, during which time market conditions have drastically changed. What once was a point of pride — the entrepreneurs’ initial experiences — may no longer be relevant.

Moreover, large corporations often suffer from ‘big company disease’, making it difficult to adapt and innovate in the new era. Even for Zheng Yaonan, who focused on second entrepreneurship upon returning to Urban Revivo, acknowledged the immense challenge: “Transformation is difficult and time-consuming, it tests the determination and resolve of the management. It’s about adapting and adjusting to market changes and internal capabilities, with people being a key element. It requires aligning personnel changes with product and channel adjustments, and execution is crucial.”

For entrepreneurs like Zheng who are relatively younger, there might be more time to tackle these challenges. However, for older entrepreneurs like Tao Huabi and Fu Qiang, the margin for error is significantly lower.

Take Tao Huabi of Lao Gan Ma, for instance. Her return brought back some customers by reinstating the original Guizhou chili, but her foray into e-commerce and live streaming was less successful, with her live streams turning into mere compilations of past interviews, eliciting sighs from the public.

A key reason for Lao Gan Ma’s continued struggles post Tao’s return was missing the ideal window to establish a strong online presence. By the time competitors like Tiger Head, Li Ziqi, and Cai Linji had captured major platforms, little growth space was left for Lao Gan Ma.

Entrepreneurs from the ’50s, ’60s, and some from the ’70s had their moments of glory in their early days. However, as times have changed, these once synchronous figures with the era have become increasingly disconnected from it, unable to narrate the future with their ‘old stories.’

As economist Wang Depei said, “The market may never lack ‘savior’ myth narratives,” but maintaining a certain ‘divinity’ of entrepreneurs is not about heroic narratives or savior plots. It depends more on their keen ability to capture epochal shifts and the courage to make strategic adjustments.

Whether these older entrepreneurs who have returned to their companies will create miracles like Steve Jobs or Howard Schultz in his earlier returns to Starbucks, or whether it’s merely a Quixotic charge, remains to be seen.