Mr. China

4 ideas

1. The factory boss who built a rival

   In the 1990s Clissold and his American partner raised over $400 million from Wall Street investors and put it into joint ventures with Chinese state-owned factories, taking majority stakes. At one venture the local general manager used the joint venture's money, staff and customer relationships to set up a competing company under his own control, while the foreign 'majority owner' could not get the books, remove him, or win in local courts. Much of the invested capital was lost this way.

2. Equity ownership is not operational control

   A contract granting majority shares and board seats gave foreign investors almost no real power in China. Control belonged to whoever physically held the company seal, the business license, the bank relationships and the loyalty of the workforce, and in practice that was the incumbent local manager. When legal title and practical control sit with different people, the party with practical control decides where the money goes.

3. The mountains are high, emperor far

   Beijing's pro-investment policies meant little at the level of a provincial factory. Local officials, courts and banks depended on the local enterprise for jobs, taxes and personal ties, so they sided with the local manager against the outsider. For a foreign investor, the relevant rule of law was whatever the local power network would enforce.

4. Capital before control invites diversion

   The investors wired cash into the ventures up front, before they had management control, reliable accounts or trusted people on site. To the factory bosses that injection looked like a one-time windfall to capture rather than a long-term partnership, and once it was spent the investor had nothing left to bargain with. The order of commitment mattered more than the size of the stake: money handed over before control was secured was effectively surrendered.

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