Mr. China (13 page)

In the space of two short years, we had grown from three people sitting in a dingy office in a second-rate hotel in Chaoyang District on the east side of Beijing into a company with twenty
businesses across China and twenty-five thousand employees.

Pat seemed like a man on the brink of greatness.

I was walking on air.

They called themselves factory rats, those knarled old engineering types with beer bellies, checked shirts and nicotine-stained fingers. Before we found them, they’d
spent the whole of their working lives as foreign expatriates, grappling with metal-bashing factories in developing countries all over the world. We hired them to form an operating team to get our
factories in China really humming; twenty-five of them, grizzled and oily, tough old bastards who claimed they could hear the clink of a badly adjusted metal press a hundred yards across a factory
floor. They didn’t exactly fit in with the Wall Street types, but the idea was that they’d be there to guide the Chinese factory directors and help them improve each of the businesses
while we got on and raised more money. But somehow it never quite worked out like that.

By the middle of 1995 we had completed our third round of fund-raising. With more than four hundred million dollars under management, we were the largest financial direct
investor in China and we were bursting with optimism. After we raised the capital, we ended up visiting nearly two hundred factories throughout the whole country. Since that covered almost all the
sizeable components businesses in China, we knew that we had invested in the best.

During the money-raising process, Pat and IHC were clear about the strategy of buying up factories and consolidating them into the largest components company in China. The investors identified
with the story. It had happened in the States so why not in China? Pat had told the investors that we would go for size; we would only use their money to buy stakes in businesses that were in the
top three of their markets.

As we trawled through all these factories, we found that Old Shi, with his business up in the hills of Anhui, was an exception. There were hardly any other privately owned businesses that had
managed to get to the top of their markets; most of the other big components businesses were state-funded. Many appeared to be stuck in a time warp back to the 1950s and 1960s when the planners had
first provided the funds. The problems surrounding state-owned companies had been at the top of the government’s agenda since the country had started to open up in the early 1980s. For years
there was no profit motive so most state-owned businesses were hopelessly inefficient, incapable of developing new products when markets changed and massively overmanned. It made no difference to
the factory directors whether the business made profits or losses; they still got the same miserable wage. Many state-owned operations were dying, drowning in a sea of debt and weighed down by
thousands upon thousands of excess workers.

But there were exceptions; some businesses made money and had a respectable market share. They were still overmanned and inefficient, but these problems had been masked in the boom years during
the early 1990s when sales grew rapidly. Some had doubled in size in each of the three years before we invested; that meant that in the space of three years, their sales had grown by a factor of
eight. We knew that they’d need a lot of work, but in the new climate of reform we thought that the factory directors would be receptive to new ideas. So we hired the factory rats and they
started drawing up vast checklists for ‘in-process quality control’, whatever that was, and putting in computer systems. It looked as if they were getting to grips with the factories,
so we left them to it. Pat went out to raise more money; by that time he had the cement, float glass and packaging industries in his sights.

The results in the first half of 1995 hadn’t been good, but the optimism about the Chinese economy endured and there was little reaction from America. After all, it was
only the first year of operations and the new working arrangements were bound to take some time to settle down. We’d delivered what we had promised: Pat had raised the capital, we’d
invested it in good factories and had found a team of experts to run them, so there was no cause for complaint. I had no particular concern, but gradually I began to notice difficulties between our
operations team and the Chinese factory directors. It was below the surface at first; just a vague feeling that they weren’t getting on, or that there wasn’t quite the right degree of
trust between the two sides. But I still wasn’t unduly anxious; the factory directors maintained their optimism; and I felt that, with their years of experience all over the world, our old
factory rats were bound to be a jaundiced lot and would take some time to grow to trust their new Chinese colleagues.

But it didn’t work out like that. As the months rolled on, the factory directors continued to be reluctant to change the way that they ran their factories and a kind of resistance set in.
Again, we didn’t take too much notice; it wasn’t entirely surprising – no one likes change. ‘Give them a few more months and it will sort itself out,’ I thought. But
the situation became worse and the first signs of seriously choppy water appeared in the autumn. The business-planning sessions for the next year were under way between the operating team and the
factory directors. By the end of the year, it seemed as if the simplest decisions, like purchasing testing equipment for a few thousand dollars, often resulted in protracted and acrimonious rows.
Our factory rats began to get frustrated and angry. I increasingly found myself being dragged into disputes. Pat gradually became fed up with all the arguments. He was impatient to get on and when
the operating team found it difficult to get the Chinese factory directors on their side he became annoyed.

The first serious warning came in the springtime of 1996. We had invested in a factory in Sichuan that made gearwheels for motorcycles. The factory director, Mr Su, came up to Beijing with a
plan to start making gearboxes and the operations team had told him not to. I thought that they were right. Making simple gearwheels is one thing, but I knew from my visits with Mr Che at the
gearbox factory up in the hills two years earlier that making gearboxes is a much more difficult business. It required sophisticated technology and designs that we didn’t have. Su agreed to
stop the project until he had done further market research, found a technology partner and prepared a new proposal for discussion. A couple of months later, we went down to Sichuan for the board
meeting, supposedly to listen to Su’s new proposals. I was a little apprehensive; Su was stubborn and would probably argue for his gearbox project but I couldn’t see how we’d ever
be able to agree; it was far too ambitious. I hoped that the discussions wouldn’t become too contentious.

When we arrived at the factory, Mr Su took us for a tour of the site. I had been there many times before so I knew the factory well. As we walked round a particular corner of a workshop, I
expected to see green fields rolling gently down to the river at the bottom of the valley, but they had disappeared. On the other side of a hastily erected fence there were two colossal workshops,
hundreds of yards long, extending into the distance, a vast new factory complex with chimneys, new power lines and rows of gleaming heat-treatment equipment. It had only been three months since I
had been there last and there had been no sign of building then. Ai Jian stood rooted to the spot, pointing inarticulately towards the building whilst Pat went the radiant pink of a Chongqing
sunrise. I eventually managed to stammer, ‘Er, Mr Su, what’s that?’ Mr Su, beaming from ear to ear, announced proudly, ‘It’s the new gearbox factory.’

At the board meeting later on, he said that he had used the Chinese partner’s money to build the gearbox factory in order to ‘save time’. Now he wanted us to agree that the
joint venture would buy the new factory buildings from the Chinese partner, doubtless at a mark-up, and launch into gearbox production. It was a knotty problem: how could we spend money on a
business when we didn’t even know if we could even make the product? But on the other hand, it was a
fait accompli
; the prospect of a disgruntled Chinese partner setting up a new
factory in the middle of ours and heading off in a completely new direction was hardly appealing.

Pat completely lost patience at this stage. ‘These operations guys just aren’t getting it done,’ he said. The ‘gearbox incident’ and others like it had brought
matters to a head. After several rows the leader of the operating team resigned. His replacement was also an expatriate and fared no better. The wrangling with the factory directors got worse and
worse until, one morning, Pat blew up. He called in the entire operating team and sacked the lot of them. He made me the President of the company and we took on the job of dealing directly with the
factory directors ourselves.

In the first half of the year the businesses continued to fall behind budget but I still didn’t see any great cause for alarm. I knew that the factory directors were
difficult to deal with but I felt up to it. With a bit more straight talking, I thought that I could bring them round. They maintained their optimistic attitude and it seemed more like a slight
bump in an otherwise smooth ascent rather than any serious stalling of the engines. We asked the factory directors to come to Beijing where we went through the numbers together. They were all
confident of being back on budget by the year-end so there were no particular alarm bells. But I never felt as though I had got the whole picture. There were nagging inconsistencies in the
description of the overall market from the various factory directors. Whenever we asked questions, they seemed to throw up a smokescreen of perplexing detail that was difficult to assemble into a
coherent story. Unperturbed by our confusion and rising exasperation, they sat on the opposite side of the table, smiling and slurping their tea out of big glass jam-jars at each meeting until they
suggested lunch at eleven-thirty.

Over the coming months, as Pat and I struggled to gain control over the course of events, I experienced a slow but relentless realization that an almost superhuman effort was
needed to bring about the slightest change. In Beijing, we had invested nearly forty million dollars in a factory that made engine parts that helped control pollution. Much of the money was used to
build a brand new facility with state-of-the-art equipment so accurate that, in theory, it could drill a hole through a human hair. It was an impressive facility, all computer screens, complicated
graphs, and control panels; one investor had toured the workshop and left after commenting that he thought ‘it looked like the engine room of the
Starship Enterprise
.’

But the product that came out at the end of the process had endless quality defects. One of the problems was that the shift managers were ‘saving money’; they refused to use the new
air-conditioning. During summer, when it was hot, they simply threw open the windows, telling us proudly, ‘No matter how hot or cold it gets, our workers will struggle through any hardship to
meet production targets.’ This was lunacy: the slightest temperature change caused minute distortions in the machines; the smallest particle of dust or grit could ruin the tiny precision
drills. Even after we persuaded them to turn on the air-conditioners, we couldn’t get them to improve the lighting in the workshop. They stuck to the poor lighting because ‘bright
lights waste electricity’. On they struggled, with their eyes straining in the gloom.

A few months later I received a call from another factory about sixty miles outside Beijing where we had one of the most modern ductile-iron foundries in China. It made brake parts; there was a
huge furnace, called a ‘cupola’, rising up in a great column of refractory brick out of the factory floor and wrapped in a ‘water jacket’. Vast ladles for moving the molten
metal hung from gantries high up in the roof and two electric ‘holding furnaces’ kept the iron liquid until it went into the moulding line. I loved going there to watch them pour iron.
With the smoke and the flames and the fiery streams of molten iron, the black-faced workers shovelling through vast heaps of coal, the roar of the furnaces and the intense heat inside the workshop
it was like some romantic image of the nineteenth-century mills that powered the Industrial Revolution. But now I was informed that ‘they had dropped the cupola.’

‘The cupola? How can you “drop” a cupola? It’s about a hundred feet high and must weigh tonnes!’

‘Yeah, I know, but they were moving it around in the workshop and it fell over.’

‘Fell over! What do you mean, it
fell over?
That thing must be worth a couple of million bucks! Anyway, what the hell were they doing moving it in the first place?’