China's entrepreneurs offer a new path

WORLD / Wall Street Journal Exclusive

 China's entrepreneurs offer a new path
By HENNY SENDER (WSJ)
Updated: 2006-07-14 13:45

http://online.wsj.com/public/article/SB115284232195906595-iBKDv5GjK34gQbv3D
9rkOTIBd1E_20060720.html?mod=regionallinks

CHANGSHA, China -- The expanse where Broad Ltd. makes its giant cooling
systems on the outskirts of Changsha, capital of China's inland Hunan
province, isn't everybody's idea of what a factory looks like, especially
in China.

A scaled-down replica of Buckingham Palace stands a few hundred yards
from the cavernous hangars where the air-conditioning systems are built.
The palace flies the red flag of the People's Republic of China rather
than the British Royal Standard. As the banner flaps in the wind, a group
of company recruits jogs by, looking like members of the People's
Liberation Army in their camouflage uniforms.

Using a technology that doesn't rely on electricity, the company's
coolers end up everywhere from facilities built for the 2004 Athens
Olympics to the new Bangkok International airport. Not far from a
building where computer banks monitor the performance of the cooling
systems all over the world, Zhang Yue, who founded Broad in 1988, houses
his helicopter and his jet plane.

Mr. Zhang is the new face of China, where private enterprise was only
officially recognized a few years ago. Today, China's entrepreneurs offer
a third path between the ailing state enterprises that account for a mere
30% of China's output and the foreign enterprises that account for over
half of the country's exports and are increasingly making inroads in the
domestic market as well.

If China is to flourish, its best hope lies not in state-owned
enterprises, which still rely on government support and subsidized
credit, but with a group of entrepreneurs such as Mr. Zhang. This group,
which barely existed a decade ago, has had great successes, but they
often lack the discipline and experience to build lasting business
empires.

The rise of the entrepreneurs comes as capital flows not only to state
behemoths, but to new enterprises. "There is a gold rush in China because
Chinese entrepreneurs can get capital and use other people's money," says
Andy Xie, chief economist for Morgan Stanley in Asia. "They have wild
dreams. But you can't always figure out where and how they make money."

"Private entrepreneurs are a transforming force in China," adds Fred Hu,
a managing director at Goldman Sachs Group Inc., who divides his time
between Beijing and Hong Kong. "But you can't look too closely at most of
them." Mr. Hu, who is also from Changsha and sits on the board of Broad,
says Mr. Zhang is different.

Unlike Mr. Zhang, 70% of the richest private entrepreneurs in China are
property developers, says Morgan Stanley's Mr. Xie. Most of those who
aren't developers are essentially traders, buying and selling goods and
companies. By contrast, Mr. Zhang makes things for which there is
demonstrable demand. At the same time, he is an indirect beneficiary of
the real-estate boom, because many of his customers are developers.

Moreover, while most manufacturing in China is all about economies of
scale that result in the lowest price, Mr. Zhang says he doesn't compete
by undercutting competitors. He says his products are more expensive than
those of competitors in Japan and Korea. The equipment used is world
class and imported to his Broad factory from all over the world. Mr.
Zhang is also unusual in that he is focused on the long term. By
contrast, "most entrepreneurs see investment as detracting from profits,"
says X.D. Yang, co-head of buyout firm Carlyle Group's investments in
Asia. "They only draw up one-year budgets. They don't build their
companies to last for years and years."

In a world where capital has never been priced realistically, and, until
recently, loans were considered government disbursements rather than debt
that had to be repaid, Mr. Zhang is careful about how he seeks financing.
"He is the only one I have ever met in China who has not asked me to get
him money through Goldman," Mr. Hu adds.

Mr. Zhang also invests time and energy in his work force. He recruits
from all over China, showing visitors a list of recent recruits and
noting how many come from China's top universities.

Certificates attesting to the fact that his company paid more taxes than
any other private company are displayed prominently in the executive
suite. Last summer Premier Wen Jiabao visited Broad, a trip recorded in
glossy marketing materials. "You must be Zhang Yue. I know you!" Premier
Wen exclaimed in his greeting," the material states. "Yes I am, Premier,
welcome to Broad Town," Mr. Zhang is said to have replied.

Mr. Zhang insists he is a rare breed in China, since he both pays taxes
and doesn't pay bribes. He also says his refusal to pay bribes is one
reason why he has failed to win certain contracts.

Mr. Zhang has become a spokesman for China's new capitalism, answering
questions with observations as pithy as anything Chairman Mao may have
come up with. "Failure is a step to success. If you keep trying, you
can't fail," he counsels recruits in an address delivered while the group
in camouflage stands in front of Broad's five-star guest house. He pens
essays outlining his philosophy toward such weighty matters as
globalization and environmental degradation.

All this is a far cry from 1992, when he made his first sale, a one
million yuan ($125,062) order from Changsha's friendship store. When he
first conceived of Broad, China was in the midst of a power shortage and
the idea of generating cooling systems that didn't rely on electricity
was intrinsically appealing. Unfortunately, later in the decade China had
a surplus of power in response to those chronic outages and orders dried
up.

Today, conservation has become a top priority of the central government
with much of the 11th five-year plan devoted to encouraging conservation.
Mr. Zhang says orders continue to flow in for his environmentally correct
cooling systems.

Mr. Zhang says he built his empire with 30,000 yuan he earned from an
interior-decorating business in Guangzhou, in southern China, early in
his career. He says his brother, a graduate of Harbin Institute of
Technology, developed the original technology.

Perhaps the most remarkable thing about Mr. Zhang is he has built his
business in Changsha, where Chairman Mao grew up and where many take
pride in that association. An agricultural province, it was known mainly
as the place to go through to get from the cities of the south to
Beijing, an overnight train ride away. There were so few economic
opportunities, ambitious young people left for the brighter lights of
Guangdong.

Mr. Zhang is part of a broader transformation that has seen Hunan produce
a spurt of entrepreneurial activity. "If it can happen in Hunan, it can
happen anywhere in China," says Mr. Hu.

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