VideoFior time immemorial, China has furnished foreign yarn-spinners with tales of epic battles. Now, as capitalism takes hold, a literature is emerging devoted to the conflicts of business. Books such as China Dream by Joe Studwell, and the newly released Mr. China by Tim Clissold—former CFO of Asimco, a company managing many China joint ventures—chronicle no-holds-barred struggles between enlightened capitalists and xenophobic Chinese managers. While they make compelling reading, they can lack the more complex shadings of the local point of view. And they tend to overlook a key player, the Chinese finance professional charged with making the enterprise work.
Xu Saihua's experience as the foreign-appointed CFO in a Chinese joint venture could have been written by John Grisham, the US bard of corporate intrigue. Her story also highlights the role of an unsung combatant in China's business culture wars. Xu, a Shanghai lawyer, was tapped by Gale Pacific, an Australian maker of outdoor knitted fabrics, to monitor the finances of Gale's manufacturing in Ningbo, a city south of Shanghai. She turned out to be the foreign investors' angel who ensured that the investment stayed afloat in an environment of conflicted loyalties. Says Xu: "I do not really know how I came through," but she quickly gathers herself and adds: "Looking back, I can see there were conflicts of interest between the two parties, as well as conflicts of principles."
Xu's story shows the level of risk that foreign companies undertake when launching a joint venture in China. During her embattled tenure, Gale Pacific bought out the joint venture partner and turned the enterprise into a wholly-owned foreign enterprise (WOFE). A preference for WOFEs, and therefore greater control, reflects the general trend in China, where struggles within joint ventures—and an easing of investment laws—have made total ownership more popular.
But there are still 285,000 registered joint ventures in China, and some multinationals prefer to go this route. One reason may be profitability. McKinsey, the US-based consultant, launched a study last year that found that among the 31 foreign multinationals it polled, each with WOFEs and JVs in its portfolio, the joint ventures had fared better. But the study also found that the ultimate success, whether WOFE or JV, depended on the presence of a local finance officer with the independence to act in the majority shareholders' interests."
Lawyer Turned CFO
McKinsey might have added, get a local lawyer like Xu Saihua to be finance chief. Prior to taking her CFO job in Gale Pacific, Xu, 30, was an attorney with a Shanghai firm, specializing in business investment and merger and acquisition advisory work. Gale Pacific was one of her clients. Then, in late 2002, Gale Pacific acquired US-based California Sun Shade.
A private enterprise in Ningbo owned by a local businessman named Lu Xianfeng, 35, was the sole supplier of raw materials to California Sun Shade. (Repeated attempts to interview Lu for a response to this story were declined.) In order to secure a continuous and cheap supply of materials, Gale Pacific's managers negotiated a JV deal with Lu. In the deal, the Australian side would invest US$1.9 million and own 85 percent of the JV; Lu would invest US$330,000 to take the remaining 15 percent. As a minority shareholder, Lu became a director of the JV, Gary Gale, Gale Pacific's managing director, became chairman of the board. Gale Pacific also appointed an independent director to balance the board.
Beginning October 2002, Xu worked closely with Gary Gale, her then legal client, to get the Ningbo JV up and running. The JV was registered in Ningbo Economic and Technology Development Zone (NETD), and the authorities there drafted a land lease contract with it. "Xu had only a glimpse of the contract and pointed out that it was illegal," Gary Gale recalls. Xu explained in detail how the clauses on dispute resolution in the contract violated current laws. Both parties were convinced and quickly made changes to the contract.
Her job done, Xu returned to Shanghai. "In early December 2002, the Chairman (Gary Gale) suddenly rang from Ningbo and asked whether I would like to work for him," she recalls. Why leave Shanghai for Beilun, a suburb some 40 kilometers from downtown Ningbo? "Of course I got a decent package," says Xu.
"But it was more [to work with] the chairman." Xu says Gary Gale "is reliable, knows about China, is smart, and treats people well." Xu thought then that Gale would want her to assume the role of legal counsel, or take on other administrative responsibilities. Therefore it surprised her when she arrived at Ningbo to find she was to be the CFO. Why appoint a lawyer to be the CFO of a JV? Gale answers: "China is very bureaucratic and laws are very important."
Unwelcome
Xu found she was unwelcome from day one. The first project after the JV completed its registration in December 2002 was to purchase equipment and raw materials. Sunshade products are seasonal and the company needed to deliver products to the US market as early as January 2003. Because time was so tight, the company decided to purchase equipment and inventory from Lu's former company. Xu took on the job of selecting and verifying the quality of the equipment and stock offered by Lu. Xu says that she questioned the usefulness of some of the equipment, and immediately earned Lu's displeasure. "I was very careful while questioning him," she says, "but Lu was still very uncomfortable, simply because his reasoning was that being asked questions equaled being distrusted."
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