How are family businesses in China planning for succession?

Succession planning is a challenge for any family business. In China, there are also cultural implications to manage.

Family businesses are an important part of China’s recent economic history. As of 2017, altogether they were contributing 60% of the country’s GDP and employing 80% of the workforce¹. Not only is their role significant in the economy, so are their stories. China’s family business landscape is replete with tales of entrepreneurs from humble backgrounds riding the trends that have driven the country’s growth to date – manufacturing, urbanization, the rise of the middle class, and so on.

The question now is how the founders of these firms will pass them on to the next generation. Indeed, for many this will be their first experience of succession planning given the relatively short history of family business in China.

Challenge of succession planning in China

Keeping successful Chinese businesses in the family is complicated. According to a 2015 Peking University study, some 80% of the next generation in China at the time were unwilling to take over their family business². The reason was a stark generational gap in values, experience, beliefs, education, and aspirations.

Fast-forward to today and the problem remains. Many of the upcoming generation are interested in sectors such as technology and banking, and they want to get involved in start-ups. There is a reluctance to simply follow in the footsteps of the founder of the family business. Roger King of the Tanoto Center for Asian Family Business and Entrepreneurship Studies at the Hong Kong University of Science and Technology brought the issue into focus: “The biggest challenge today is how to embrace the next generation to bring them back to the family fold.”³

Steps toward effective succession planning

China’s family businesses have driven much of the country’s economic growth over the past 40 years, and they have accumulated a remarkable amount of wealth. This means there is much at stake in terms of the quality and efficacy of their succession plans. So what steps do they need to take to prepare for a smooth transition of power?

Name the person in charge

Identifying the person responsible for succession planning is the first important step. Depending on the governance structure, this may be the CEO or the board of directors, but it is necessary for the responsible party to be defined and accepted. This will manage expectations across the family as plans for leadership and ownership are developed and worked toward. Moreover, the person in charge of succession will be responsible for defining the family’s legacy and outlining the shared values that will keep the family working together across the generations⁴.

Prepare the next generation

Preparing the next generation to take over the family business is essential for effective succession planning. Training should ideally begin early and involve an in-depth orientation about the nature and dynamics of the firm they are set to inherit. It is also important to instill a sense of stewardship, as the next generation will be managing more than the business; they will be responsible for preserving and advancing the legacy of their family⁵.

Another aspect of prepping the next generation is to establish a framework for managing conflicts in the family, which are not uncommon. Succession planning requires contemplation about change, retirement, and mortality, all of which are uncomfortable topics and can create tensions across the generations. The more deliberate thought is given to these topics, the better the succession planning will be. The EY Global Next Generation Program, which works to connect family business successors around the world, can offer needed perspective on these challenges and assist the next generation in navigating them.

Establish communication norms

Establishing communication norms are another essential dimension of succession planning. This has to do with building solidarity among family members through activities such as collaborating on philanthropic projects and through working together on drafting succession-related documents, such as family constitutions. Preparing these documents can facilitate understanding about a family’s legacy, flesh out the sources of tension and disagreement, and confirm the next generation’s commercial and familial roles during succession⁶.

Because the history of family business is comparatively short in China, many firms are still owned by the first generation and have not yet planned their succession; as a result, they have not set up the kinds of communication channels needed to ensure family members are on the same page about the future of the business. This is partly because they do not have many benchmarks for doing so, which is to say that succession planning is a relatively nascent idea in China. However, with many founders nearing retirement, the need to put a plan in place has gained urgency, making communications a central challenge.

Promote entrepreneurial thinking

This may seem intuitive, but friction can arise when the next generation has very different ideas about management and strategy than the founding generation. Finding the balance between the family business’s heritage and the demands of a quickly evolving marketplace is an acute obstacle, but it is one that must be overcome. As with most things, compromise from both generations about strategy can go a long way toward facilitating collaboration between family members and giving the family’s future leaders a sense of real ownership.

An example of this is the way in which some family businesses are diversifying into other sectors or evolving traditional businesses to include new, technological focuses. Driven by the next generation, these changes in direction reflect something of the independent-mindedness of these future leaders and their desire to prove themselves in their own way.

Family business outlook in China

The challenge of succession among China’s family businesses is acute. Some families have considered and even moved forward with bringing in an external manager to succeed the founder. However, given the cultural importance of loyalty in Chinese families, many would prefer to keep succession within the family. We are yet to see whether current generational tensions will subside over time.

Another trend is the development of what are becoming known as “business families,” where multiple businesses may be owned and operated by family members. In this model, preserving the original family business becomes less important than maintaining the family’s value system and entrepreneurial spirit. Because of the generation gap and the associated tensions between Chinese founders and their children, adopting this approach may help give the next generation the necessary leeway to evolve the existing family business or pursue new opportunities.

China’s family businesses are beginning an important chapter of their stories. As many prepare for their first generational handover, deciding what to prioritize, how to align the multitude of individual interests within a family, and how to perceive the challenges and opportunities in the market, have become pressing challenges. The steps outlined above are integral to the succession process and will help families undertake the difficult conversations and planning that are inherent in successful transitions.