I’m often asked whether it’s more difficult for a Chinese company to survive now than it was in the 1980s, when I started my business. The two eras are indeed different. Many entrepreneurs with whom I shared the stage at awards ceremonies have since disappeared, swept away like sand on a beach by the waves of market competition. Having experienced these waves, I am deeply aware of the strong differences between the old and new systems, as well as the tremendous energy released by reform in China.
Legend Holdings was founded in the 1980s. For me, operational issues weren’t too difficult. But adapting to the environment—and making sure the company would survive—was hard.
At that time, China was in a wrenching period of change as the nation switched from a planned economy to the market economy. Laws and regulations were not sound, legislation and law enforcement were inconsistent, and there were big differences in resources available to companies in the planned versus unplanned economies.
Companies in the planned economy had production approval and foreign exchange quotas. Companies like Legend Holdings had to buy quotas at high prices and purchase components by exchanging money on the black market at huge risk. A company needed clear goals. It needed to research policies until they were clear to determine the bottom line and how to take action.
In retrospect, the environment then was very dangerous. But even if we were fined, we did not have the kinds of attitudes common among today’s companies. We didn’t feel mistreated by fines, because the other side was indeed acting in accordance with the system. Neither did we feel ashamed, since many policy provisions were running contrary to the market economy. We believed that things would change in the future.
In that era, companies in the planned economy didn’t really “sell.” The state provided procurement channels, set prices, and allocated buyers. Everything was resolved through “procurement meetings.” A company was just a factory, and the public’s enthusiasm was the market kept at bay. Products were always in a state of “shortage.” Companies were not competitive; a big wave of one kind or another could completely wipe out a business.
Legend Holdings was closed out of the planned economy. Without powerful connections, without influential supporters, the company was almost unable to do anything. But precisely because of this, we were not bound and tied down like companies inside the system. We worked hard to research the market, to research the environment.
After setting goals, we did everything possible to develop and reach them. In this process, we continuously studied the laws of business operations and the laws of management to force ourselves onto the road of the market economy. Because of our sticking close to the rules, because of being tried and tested like this, Legend Holdings was able to emerge from that era and develop to where we are today.
Reform and Opening has gone on for more than thirty years, and China’s economy has undergone tremendous change. New laws and regulations have been established in every field, changing the previous situation where there were often no rules or where the rules did not suit the market economy. But new problems have emerged. Law enforcement can be unfair, and some officials demand bribes. There are big differences in the work efficiency levels among government agencies, and law enforcement often has too much leeway to interpret the law.
Uneasy Entrepreneurs
In the early days of Legend Holdings, China had no business rules. Everyone could run wild. A prominent problem today is that some people act in accord with the rules while others flaunt them, creating an unfair playing field.
Selective enforcement is the biggest complaint among today’s entrepreneurs. It’s a major source of unease. People often have this worry: Will mentioning my opinion offend someone? If those enforcing the law are looking for a problem in a company, to some degree they can always find one. In addition, the allocation of some resources brings personal relationships into play, and the system creates incentives for rent-seeking.
Legend Holdings has always done what we say we will do. As a company, we must be lawful and compliant. We never exaggerate or promise anything we can’t deliver. This may be a reason why Legend Holdings is so well-respected when it makes local investments.
At the same time, we have set methods for developing strategies, and we especially emphasize risk avoidance. Each sector that Legend Holdings has entered, such as the agriculture and food industries, is little affected by political economics and relies more on market competition.
Entrepreneurs seriously develop companies within the legal framework. They pay taxes as required. They create jobs. They continuously promote the national economy and establish good business morals. On top of this, large companies must better fulfill their social responsibilities and carry out public welfare undertakings. These should be encouraged.
If entrepreneurs are made to feel uneasy, some entrepreneurs will pay more attention to currying relationships with the government rather than running their companies well. This is bad for economic development. Thus, I particularly hope the government can implement a systemic design embracing the economy, politics, society, and culture.
Incubator Eggs
Here’s an analogy: The relationship between a company and the regulatory environment is like the relationship between an egg and an incubator. The most suitable temperature for incubating eggs is 37.5 degrees Celsius; neither too hot nor too cold will do.
Before Reform and Opening began, the temperature in the incubator was in the 90s. No company could survive. By the time we went into business in 1984, the temperature might have been 40 degrees. Only extremely tenacious chicks could hatch. Later, the temperature gradually adjusted to better incubate chicks, but recently the temperature has risen. For the country, we cannot require chicks to have such tenacious vitality. We should adjust the temperature. But companies as chicks should still think about how to be more tenacious, to grow in a harsh environment.
How can we create a suitable environment for companies? This requires the government at the highest levels to promote effective reform in the wake of the 18th Party Congress. This won’t be easy. It will require the leaders at the highest level to unify their thinking to implement systemic design. It is not easy to reach a consensus between economics, society, foreign relations, and military affairs, or between different levels of government or different government agencies. Systemic design is a very complex thing.
Entrepreneurs overall have two requirements for their operating environment: guaranteed property rights, and rules that everyone can follow. When setting rules, the space for interpretation should be reduced, and human factors should be reduced in their enforcement. In addition, the government structure is too big, which will affect efficiency and increase fiscal spending. It should be appropriately reduced.
Don’t Worry
I’m not worried about China’s demographic dividend disappearing. Chinese people are very smart. Reform and opening gradually unleashed the people’s capabilities. These were demonstrated as “a strong ability to imitate,” with workers who have “strong desires to do better.” These have been the core driving forces of the country’s economic development.
I don’t think Chinese people are unable to innovate. How many years of experience have we accumulated? I think the time has just not yet come.
While China’s demographic dividend is shrinking, it cannot be overlooked that China has accumulated a lot of wealth in recent years—and not just monetary wealth. Entrepreneurs have also accumulated a lot of capital and experience. Although labor costs have increased, companies can establish headquarters in China and then set up factories abroad. They can also combine the management experiences of U.S. and European companies with the practices of Chinese companies.
After Reform and Opening, foreign companies set up factories in China and trained a large number of professional managers. Chinese companies in recent years have also started moving onto the international stage and studying global management experiences. China could now, with a global field of vision, consider its development strategy and deploy employees and resources around the world.
Chinese entrepreneurs have also gradually gained global management capabilities. These are part of the nation’s wealth. If taken advantage of, and with the right guidance, I am confident China’s economy will undergo even greater changes.
Reform and Opening unleashed the enthusiasm of the Chinese people. The fundamental force driving the economy’s development is reform. If political and economic reforms are matched to complement one another, we will see more energy released.
The 18th Party Congress proposed as a core issue building a socialist market economy by balancing the government and market properly. This could not be more correct. The government is mainly a formulator of rules and must not try doing the job itself. Direct government interference in the market should be reduced as much as possible, and all companies in the market—whether state-owned or private—must be treated equally. If this relationship can be handled properly, there will be significant potential to tap in the economy.
I don’t agree with the argument that the country’s economic growth will slow. For example, the price of Chinese agricultural products, especially name-brand food products, may continue to rise. Consumer demand will become more refined, from having food to eat and clothes to wear to eating and dressing well. Electronic products have already become fast-moving consumer goods. On top of this basic consumer demand, urban construction, clean energy, and the medical industry can all be improved and refined.
Legend Holdings has developed a clear medium-term strategy devoted to creating more excellent businesses in different industries and becoming a listed holding company between 2014 and 2016. We have selected several industries, including consumer goods and services, chemicals and new materials, and modern architecture, all conforming to national trends. But we will not seek high, short-term returns. The industries in which we are setting foot will take four to five years to cultivate, maybe even seven to eight. Some opportunities may take longer. This will enable Legend Holdings to maintain long-term, sustainable corporate profit growth. I hope that after Legend Holdings has listed, we can refresh the market.