Most family businesses in mainland China are faced with a succession dilemma, as few second generation scions are willing to take over the family firm, according to a study released this week by the Tanoto Center for Asian Family Business and Entrepreneurship Studies at The Hong Kong University of Science and Technology.
The Center’s director, Professor Roger King, who led the research, says that 80% of second generation “heirs” have no desire to join the family business themselves. Rather, most want to start their own business.
The study, titled The Future of Chinese Family Businesses, reveals, conversely, that over 70% of family business owners in the country hope to pass the reins to their offspring.
An increasing number of China’s “new wealth” enterprises – born from the 1980s onwards, in the wake of the country’s reform and opening-up policies – are currently in transition from first to second generation in terms of management and ownership. If they are not “passed down,” this leaves the issue of whether and how to sell up.
“When you talk to a private equity person, they tend not to buy family-owned businesses,” says King, “because typically in such businesses, you have one boss and everybody listens to that boss.” Investors are therefore unwilling to gamble on such firms as there is a risk they might fall apart once the owner steps aside.
“A lot of Chinese business are relationship-driven, trust-driven,” he adds. This makes it harder for new owners to come in and run things smoothly.
Another hurdle for family businesses relates to their ability to upgrade or transform operations. Most of the businesses started in China from the 1980s onwards are low-cost and low value-added, which is part of the reason why second-generation family members are reluctant to take over. Many of these youngsters are western-educated and want to be involved in more “sophisticated” industries, according to Professor Winnie Peng, the Tanoto Center’s associate director.
She adds that 50% of those who are set against taking over the family business say they want to enter the financial industry.
Meanwhile, the research also found that silver-spoon kids who sidestep the family business still tend to use their family’s social or financial resources to grow new ventures.
King believes the traditional notion of the “family business” is gradually shifting to that of the “business family,” which refers to rich families who diversify their wealth through managing multiple businesses and investments, instead of concentrating in one core business or holding onto a legacy.
“Globalization is an issue, and technology is moving in very fast,” which may help to explain people’s wariness about the future of low value-added manufacturing in China, says King. When the business environment is unstable, it is natural for business owners to seek to diversify, he adds.