Legendary ‘Mr China’ investor explains why global asset managers will struggle to crack Chinese market
China is seen as the jewel in the asset manager’s crown. Since restrictions on foreign ownership were relaxed for the funds industry in April, global firms including BlackRock, Fidelity International and Vanguard have applied to set up wholly-owned mutual fund units in China, hoping to tap the country’s fast-growing USD2.6 trillion retail fund market.
Jack Perkowski is often known as ‘Mr China’, having been one of the earliest foreign investors in the country when its markets first opened in the 1990s. A Wall Street veteran, he raised USD400 million for investment in China, founding automotive business ASIMCO Technologies in 1994, which was sold to Bain Capital in 2009.
Perkowski’s adventures in the early days of direct investment in China were the subject of a 2005 memoir by an old business partner, entitled ‘Mr China’. The book transports readers back to a time of double-dealing factory managers, fraudulent businessmen, and moonshine-soaked dinners with local government officials.
But not everything has changed in China’s idiosyncratic business landscape, according to Perkowski, who says in an interview with Institutional Asset Manager that the country is still growing and developing at a breakneck pace. His company JFP Holdings, which is headquartered in Beijing, was founded to help Western companies bring their products to China.
What was the business environment in China like when you started out?
China in the 90s was very difficult. We were one of the first major foreign investors in the country, and we make no secret of the fact that we had a lot of issues. In China, it's not whether or not you're going to have problems, because even today with all the improvements have taken place since the foreign investment in China started, it's still a very difficult place in which to operate.
Virtually no company that has gone there, or is going there today, is going to get away without having difficulties of some type. It's not a question of whether you face difficulties, it's a question of what you do to resolve those. What I tried to do in my book, Managing the Dragon, was really talk about what we did to address all of the issues, and I go through a couple of the key problems we had, like when a general manager at one of our factories set up a competing factory.
What issues are global asset managers going to face when they try to open shop in China?
When international companies go to China, they try to do business in China the way they do in the UK, Europe, the US, or wherever they happen to be located, and that doesn't work. The same happens when Chinese companies go to the United States, they try to do business the same way they do business in China, and that doesn't work.
If you take any one of these large asset managers, they have a great global reputation. Frankly, unless they've got a major operation in China, people in China have no idea who they are. We used to find this in the automotive components area – we once hired a ‘foreign expert’ from a famous US company called Eaton, but when I was introducing him to Chinese managers, all we had was a bunch of blank stares.
So, all of these big asset management companies have a big advantage in the United States, Europe, UK, because they're big companies with long histories and well-regarded reputations. They may go to China and have no name recognition. Their biggest advantage is their name recognition outside of China, and when they go to China, that's gone.
And today, all their competitors are coming to China, so they're going to basically find the same international competition. At the same time, the Chinese asset management business hasn’t been standing still either, and these Chinese asset management companies are going to implicitly know how to deal with Chinese clients.
The third factor is that China has now opened up ownership of the asset management business, so foreign companies can own 100 per cent. It was just changed in June of 2020, which is why they're all trying to go there. Even though that's true, the yuan, the RMB is still a controlled currency, so it's not freely convertible. A Chinese citizen legally cannot send more than USD50,000 outside China every year. A lot of the products that some of these big asset management companies would normally have to offer won't be available, or they won't be able to offer them to their Chinese clients.
How has doing business in China changed since you first started investing in the country?
When I started ASIMCO in 1994, the only industry in China in which a foreign investor could have majority ownership was auto components. Now over the years, that's changed quite a bit. Every year, China puts out what's called a negative list, which are the industry segments where there's some kind of foreign ownership restriction. And if you track it, you see that every year the number of sub industries on the list has been going down. These are very specific industries, and they took off the ownership restrictions on financial companies, securities firms, asset management companies, that was previously limited to 51 per cent, so you could have majority, but you couldn't own 100 per cent.
My point is that over the years, China has opened up its market to foreign players, and that's something that most people don't appreciate. They think of China as a closed economy, and it's not a closed economy. The issues that international companies have in going to China are not so much from a regulatory standpoint, or from all the other organizations they are going to have to deal with, like learning how to deal with government. Those aren't the real issues. The real issue today in China is that the competition in almost any industry is so much stronger than it was 20 years ago.
What have you learned through doing business in China?
Going back before the last five years, I’d say, China in every industry was a much, much less developed country. Certainly from 1992 to 1994, when we were visiting Chinese factories, they didn't look anything like factories in the United States, or Europe. They had dirt floors, very rudimentary, and they really had no benefit of capital. China was only opening up to the outside so that capital would come in, and it was very easy if you're from some major company that has modern factories around the world to go into a Chinese factory and come to the wrong conclusion that they weren't really good managers. It was very easy to look down on them.
What I came to learn was that if you put it in the context of a European or US factory, that might be true. But what a foreigner didn't realise is that the Chinese managers had to deal with things that they never had to deal with. For example, we sold a lot of parts for diesel engines. We would make a fuel pump for Yuchai, which was our biggest customer and was the leading diesel engine supplier in China. Yuchai would put our fuel pump in their engine, and then sell their engine to First Autoworks. Well, China back in those days had triangular debt. So, First Autoworks couldn't pay Yuchai for the engine in cash, and instead they gave them trucks. So Yuchai had to sell trucks to basically collect their money. And then for some of our fuel systems, they paid us in trucks, and so our general managers had to collect roughly 40 per cent of their receivables by selling trucks. What Western manager had to do that?
What I came to realise was that the way to solve issues in China wasn't to bring in experts from outside China, it was to basically find people in China who already knew what they were doing, and to build on them. Our local management strategy that we pioneered meant that by the time I left I was the only foreigner in a company that had all foreign capital.
What does this mean for foreign companies trying to tap local markets?
Most large multinationals in China will say they have a lot of Chinese managers, and that's true. But then the next question is, what decisions can they actually make? Are they empowered? And if you really dig down, what you find out is that the key decisions are being made in Detroit to New York, or Stuttgart or wherever the home office is.
Very few truly localise their management in China, which is why, over time, they tend to lose out to Chinese competition. What's happened in the last 20 years to 25 years is that the Chinese have gotten access to a lot of capital, and the economy has grown tremendously, so the companies themselves are much bigger today. They've become better managed, because they’ve had to manage a bigger operation where they’re probably doing at least some things globally. If you try to go in and compete against those companies, as a foreign company, then you're going to lose every time.
The scariest time of a father's life is when your kid turns 16 or 18, and gets their driving license. The reason that’s scary is because you know that on the first Saturday, they're going to come and ask you for the keys to the car. You're not going to want to give them over because you start thinking of all the bad things that can happen – they could have an accident, or their friends might be drinking. But then you think about it, and you say, they've been raised to be responsible adults and so you trust them, and you turn over the keys.
Turning over the keys is the biggest impediment for foreign companies, because they want to have Chinese managers, but they don’t want to give them the keys. They really want to make the decisions in London or New York or somewhere else. But in the end, that's what you really need to do. If you turn over the keys, you show your Chinese managers that you really trust them, and that's when you get their loyalty.
How long will most of these global asset managers last in China?
Most of them have become very excited because this law just changed, so they can own 100 per cent, great. They'll go to Shanghai, they'll take out expensive offices, fit them out, they'll probably hire some Harvard-educated Chinese person who’s lived in the United States all his or her life and knows nothing about China, because even though they're Chinese and they speak Chinese, they’ve been out of China all their life. They send them to China, and they're going to have exactly the same problems.
They'll do all of that, and whether they're successful or not, who knows? But I would say that after two or three years of losing money, because you have all the money going out and nothing coming in, they’ll either shrink it back, or not talk about it anymore. They’ll maybe feel that they have to be there to have a presence, but never make it really profitable.
Is the China dream still alive?
For sure, all the asset managers have the China dream. What they don't have is the reality of what it’s really going to take to be successful in the country.
There are a lot of reasons to go to China. In addition to the fact that the regulations have changed, there’s also the fact that China still has a roughly 50 per cent savings rate. The amount of bank deposits in China, is around USD30 trillion, compared to USD15 trillion in the United States. It's about double what it is in the States.
What that tells you is that China's financial services and capital markets aren’t as well developed as they are in developed economies. There’s no reason why you’d keep money in a bank, earning 1 per cent or whatever it earns, if you had a better place to put it. The reason for all those bank deposits is because there aren't the financial instruments that are available, like there are in a much more developed economy. And so with the high savings rate, the fact is all this capital ultimately is going to get recycled through the capital markets through asset management companies and securities firms – those are powerful incentives to be in China.
There's no question that it’s the right target, as there's probably no other country in the world where there's that much opportunity. The difficulty is in trying to access that.