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  1. Analysis
January 15, 2018

How private banks can solve China’s family succession crisis

By Oliver Williams

A host of surveys and studies have revealed that more and more Chinese successors want nothing to do with the family firm. Head of WealthInsight, Oliver Williams, looks at why this is, and whether this trend could catch on in other markets.

In 2014, a global survey of 2,378 family businesses by KPMG revealed that only 28 % of family run firms in China plan to pass ownership to the next generation, one of the lowest scores in the world.

The shockwaves from this study triggered another by Peking University asking sons and daughters of business owners in China whether they wanted to take on the family firm. As many as 80% said they had no intentions to do so.

Looking specifically at the manufacturing sector (which accounts for the lion’s share of Chinese family firms), Fortune Generation reckoned that more than 65% of children whose parents own manufacturing businesses do not want to be involved in the same industry, let alone the family firm.

While these figures point towards an alarming succession crisis in Chinese family run businesses, further evidence suggests that it is already afoot. A study by the Tanoto Center for Asian Family Business and Entrepreneurship Studies looked back at a 100 years of family businesses around the world and found that those based in China and Hong Kong had some of the shortest tenures under one family.

Blame Education

For private bankers tackling the thorny issue of succession, it is crucial to understanding the root of this trend. Many who study Chinese family business have blamed western education. Studies show that around 52 percent of family business successors are sent to study overseas, mostly in the US and UK.

When (and if) these graduated offspring come home they are often bewildered by a business whose traditional management probably contradicts western business principles picked up abroad.

Others blame this succession crisis on China’s unique history. The rapid rise of first-generation wealth and the legacy of a one-child policy has meant succession planning has never been at the forefront of China’s business culture. That culture itself is barely a few decades old, with private enterprises previously banned under state communism.

Instead of taking on a cumbersome industrial or manufacturing conglomerate, which currently account for most HNWIs’ wealth in China, more entrepreneurial heirs are inspired to start their own venture in the tech or finance sector. Not only are these sectors considered cooler by millennials, but they are normally centred in cosmopolitan coastal cities instead of inland powerhouses.

Some economists see the bright side of this generational switch. Mining and manufacturing are often seen as ‘sunset’ industries soon to be replaced by robotics if rising wages don’t get the better of them. Better that young bright minds use the wealth of their forebears to pioneer China’s new knowledge economy.

 

Is it just China?

But the bigger question that private banks need to ask is what if this succession crisis is not just unique to Chinese family enterprises?

In Asia as a whole as few as 38% of HNWI children work in the same company as their parents, according to analysis of WealthInsight’s. Some 49% work in the same industry.

The same data also shows that 59% of HNWI offspring from all frontier and emerging markets are sent abroad for their education. Again, the US and the UK are the biggest recipients of their latter-day grand tours.

Family businesses are more often than not the mainstay of these same frontier and emerging markets. In GCC countries, for example, family businesses generate more than 80 percent of non-oil GDP according to PwC.

Sunrise or sunset, these industries are crucial to these economies and private bankers alike. Not only is a feuding family the quickest way for it to lose wealth, but research now proves that a poorly managed succession is unlikely to be successful.

If education is at least partially to blame then it is fortunately one of the problems that can be solved by a private bank.

Succession programmes are now being offered by more and more local and global private banks to aid the transfer of wealth as well as business. Many include both senior and successor in their classes, something that is absent from typical university degrees. Allumni networks of these programmes can help families in the same industry or geography learn from one another.

Programmes like these can no longer be aimed solely at western or Chinese HNWIs however. Private banks need to start expanding these programmes to all markets they operate in to nurture the transition of business ownership. After all, a successful succession is for the good of family and economy alike.

 

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