New generation inherits challenges in family business

The second generation of family businesses in China seem to be inferior to their predecessors in terms of running their companies, according to the 2013 Family Business Report released by Forbes China.

Although the average compound growth rate of primary business of the surveyed Chinese family companies during the reign of the successors is almost twice of that of their fathers' generation, the compound growth rate of net profit is only 2.5 percent on average, far lower than the average 9.9 percent of their predecessors, the report said.

During the years from 2010 to 2012, the average net profit rate of the surveyed family enterprises, which are under the control of the second generation, is lower than that of their predecessors, so was return on equity and return on assets, the report further found out.

"The disparity is extremely noticeable this year. But, looking globally, the less satisfactory performance of the second generation is quite normal. The younger generation is not as strong as their predecessors in terms of entrepreneurship," said Zhou Jiangong, editor-in-chief of Forbes China.

But Zhou stressed that a large number of the second generation of Chinese family enterprises took over the business at a time when the economic growth rate slowed down in China. Private enterprises, most of which are family businesses, were confronted with unprecedented difficulties.

"Meanwhile, the manufacturing industry, which attracts most Chinese enterprises, has been undergoing restructuring recently. Therefore, it is definite the performance of these enterprises will be affected," Zhou added.

It is the fourth consecutive year that Forbes China has conducted this survey. And for the first time, the number of filial relations found in Chinese family enterprises has outnumbered that of fraternity relations, only second to conjugal relations.

New Hope Liuhe Co Ltd from Sichuan province, which specializes in the agricultural and fishery industry, remains the largest among the top 100 listed family enterprises in China, the report found out.

"Most of the second generation of family businesses have studied abroad, which offered them systematic training in business operations. But they don't have enough work experience to manage the whole business yet," said Rui Meng, co-director of the China Europe International Business School Kaifeng Center for Family Heritage.

Rui added that most Chinese family enterprises were passed on among family members instead of allowing experienced talented people to enter the business.

As explained by Zhou from Forbes China, founders of the family businesses should make preparation for their second generation in terms of corporate governance structure and the differentiation between family wealth and company profits in order to make the handing over of a family business successful.

The lack of qualified professional executives in China as competent as Jack Welch, the former chief executive officer of General Electric Co, also poses difficulty for the successful handing over of family business, explained Zhou.

"In addition, some second generation simply don't want to take over the family business nowadays," he said.

Yu Jiangbo, 28, general manager of Zhejiang Neoglory Jewelry Co Ltd, hadn't experienced any part of the family business until he started working at his mother's company in 2008 after studying abroad for six years.

"My parents won't retire in the next five years because they still don't think I am experienced enough to take over the whole family business at the moment," said Yu.

Neoglory was launched by Yu's parents in 1995. They are now trying to transform it from a manufacturer and wholesaler of cheap products to a middle- and high-end brand of high quality items.

Through the past five years, Yu has worked on finding global business partners all over the world such as Zara, H&M, and Accessorize and introducing the branded products to them all over the world.

"I want to run the company in my own way with guidelines from my parents to focus on brand building and online platform expansion in the next five to 10 years," said Yu.

Yu added he would apply more modern management concepts into the company in the future to create a complete transition of a traditional privately owned manufacturer.