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Examining Family Businesses: Adapting to a New Environment

Family firms are common across Asia; many of the region’s largest organizations are family owned. In a series from HKUST Business School and its Tanoto Center for Asian Family Business and Entrepreneurship Studies, faculty analyze the advantages of the structure and the challenges facing family businesses today, and they discuss what other family businesses across the world can learn from successes in Asia.

Family businesses have sprung up in mainland China since the 1978 reform and opening up policy and, over the years, have become the most significant sector among privately-owned enterprises. It is estimated that family businesses contribute 70% of national GDP - and employ 75% of the nation’s workforce. Over 85% of the private sector consists of family firms, generating about half of tax income in 2016.

In the early days, the majority of mainland Chinese family businesses served the domestic mass market, or were original equipment manufacturers (OEMs) for brands in developed economies, with low cost and value input. However, from the 2000s onwards, with the rapid rise of China’s new middle class, technological revolution, and globalization, consumers’ purchasing habits and tastes changed dramatically. Price was no longer the top of their concern. Instead, more and more consumers began eyeing high-value, branded products, and quality service. At the same time, due to rising manufacturing costs – and an increasingly competitive global market – the traditional OEM model was no longer sustainable for family businesses serving overseas clients. Business transformation and upgrading became the pressing issues facing businesses in mainland China.  

While a large number of family businesses are still struggling to cope with these challenges, some have gradually transformed and upgraded themselves in the past decade. In early 2017, this author started a case-based research on 43 industry-leading family businesses across China. All were among the top 10 companies in their own industry in the past three years based on total revenue and net income, with an average revenue of over RMB $10 billion in 2015. The data was a combination of first-hand interviews with the owners and secondary information from the public domain. While the research is still ongoing, a few major strategies have been identified among these firms.

Brand Creation and Acquisition

As a strategy to move up the value chain, many family businesses in our sample built their own brands, or acquired premium brands overseas. Either way, families recognized the importance of branding as a long-term investment, something which coincided with the long-term orientation of family businesses. 

Brand creation represents an organic growth strategy, requiring integration of the value proposition of the existing business, and at times the family’s reputation, history, and culture. “We originally served as an OEM for overseas brands. We realized this model was not sustainable in the long run. Through years of effort to enhance our product quality, promote the culture behind silk, and build the art value of silk products, we are able to create our own brand,” said Li Jianhua, Manager of Wensli Group and son-in-law of the founder of this leading silk manufacturer. The brand premium was significant, according to the family.

Overseas brand acquisition offers an accelerated path to distinctive products and their brand identities. Yet business integration and cultural conflicts could be potential challenges. For instance, NeoGlory, one of China’s largest jewelry brands, boasting the world’s largest fashion jewelry factory, acquired overseas premium brands such as the license of Belgium cartoon Smurfs, and also became the largest distributor for Swarovski in China. The new additions complemented its own brands such as NEO’S, FA, and EVA, and extended its global brand presence.

Branding could also play a very important role in legacy-building for family businesses. “A brand is not only about quality and technology. There is no exception if you look at every successful long surviving enterprise that beholds a top brand admired by all,” said Weng Rongdi, CEO of Langsha Group, a household apparel brand. How to instill stewardship and apprenticeship in future generations could be crucial for a family in preserving its legacy and this should be addressed early on.

Diversification Strategy

Business diversification was a popular strategy among our sample firms. When the business grew beyond a certain size, the owners saw the need to diversify in order to reduce risk in having all their eggs in a single basket and sustain the business in the longer term.

Transgenerational entrepreneurship is conducive to the diversification strategy. Most of the time, the rising generation helps the family explore new opportunities outside its traditional business. “In fact, it was entrepreneurship and diversification together that contributed to our group’s current leadership position in the market. I would prefer to call myself the second generation of entrepreneurs, rather than the second generation of the rich, as the media label us,” said Liu Chang, Chair of the New Hope Group, a leading company in China’s agricultural, forestry, and fishing industries. The group expanded into a multi-industry portfolio including financial services, transportation and storage, and technology, media, and telecommunications covering over 30 countries, with more than 70,000 staff and over RMB $100 billion in revenue.

However, there are a few gigantic companies in our sample which chose to focus on a single business. “At the beginning, we did not know we needed to specialize,” said Cao Dewang, founder of Fuyao Glass, one of the world leading suppliers of automotive glass. “We would have had no competitive strength if we had no focus, because our time and expertise were limited.” Given a more stable business environment, we see more companies adopting the specialization strategy in the future.

“Internet Plus”

As a national policy proposed by Premier Li Keqiang in 2015, “Internet Plus” refers to the application of the internet and other information technologies in conventional industries. A large portion of our sample companies realized the power of new technologies such as e-commerce and social networks at a much earlier date.

“Embracing internet technology is an irresistible trend in our industry,” said Yu Jianbo, the second-generation leader of the NeoGlory Group. “It facilitates customization.” In 2010, Yu set up the Group’s flagship stores on eBay and Tmall. In 2014, he built up a new e-commence platform called Jushiyun, the first network aiming to integrate the global jewelry supply chain This integration doubled the sales of the Group.

Centralized decision-making in family firms secures the quick responses and flexibility required in changing the existing business model in the “Internet Plus” era. Xiu Yuan, a second-generation family member in Xiu Zheng Pharmacy, initiated a “4+2” program integrating customer information from all four offline distribution channels and two online platforms. The integrated information allows the firm to improve its efficiency in manufacturing and delivering its products to target customers.

Disruptive technologies, however, force companies to rethink the way they approach their business. Fintech, for example, is reshaping the financial industry in mainland China. From my prior study, family businesses, especially those in high-growth industries, appear more vulnerable to these changes. Entrepreneurial families will have to derive a proactive strategy navigating this wave – possibly with the help of capable professional managers, and through business diversification – to survive in the longer term.

Commitment to Research and Development

To boost productivity and maintain technological leadership, a number of our sample family firms actively invested in research and development (R&D). For instance, Liby Group, one of the largest mainland manufacturers of medical, health and beauty products, spent about RMB $500 million on a new R&D center. The center has continually collaborated with top local research institutes and leading international chemical groups to drive its product development. Hunan Jinlong Group, a family-owned manganese producer, has invested RMB $10 million annually in scientific research funds for developing new equipment and technologies for manganese production. 

The family businesses in our sample share several major strategies in transforming and upgrading themselves to gain sustainable leadership in their respective industries. The long-term orientation of family firms allows more patient capital to be put into branding and R&D investment, compared with non-family firms. The entrepreneurial spirit in the family’s blood helps them with business diversification and overseas acquisitions as opportunities arise. Flexibility and centralized decision-making in family firms also endow them with quick responses to destructive technologies, and help them ride new opportunities in the “Internet Plus” era.

However, for family firms to capitalize on these strategies and survive in the long run, they need to build their core competencies, enlarge their talent pool – should it be the next generation of family members or professional managers, carry on innovating, and preserve family values and legacy down the generations. Our research will continue to gain a deeper understanding of the relevant issues.