Case in Point: Deciding what had to be done to save a Chinese factory

June 26, 2013

The big idea: It’s certainly no news flash that many business schools, much like corporations, have been busy building partnerships and campuses around the world. For both groups, the market is alive with snake-oil salespeople. Yet opportunity can be missed when concerns about fraud prevent action. At a fundamental level — it’s a business problem — we can’t expect perfect information. This means separating information into “must have” and “like to have.”

The scenario: Peer Nielsen had helped build businesses and turn around failing ones. He lived in Beijing and worked all over Asia. At a breakfast meeting with Baocheng Yang, a fellow alumnus of Darden School of Business, Nielsen was invited to look at a capacitor factory, China Star Technology Electronics, in Henan province with Yang and a friend, Zhihong Li. The factory presented a means of entering the growing capacitor market, which included the new development of supercapacitors. How could Nielsen refuse?

The three headed to Shunyi City to explore the business. Nielsen knew that turnaround situations are inherently complicated, with intertwined financial, operational and governance issues. Information was scarce, and the interests of workers, managers, government leaders and banks were rarely well delineated.

Yang and Li developed relationships with two key bureaucrats — who could make things easy or difficult. Once the political heavyweights realized that the trio was interested in investing in the capacitor factory, the tone changed. Over two weeks, the two groups had a series of professional and social meetings. Eventually, all necessary permissions were granted.

The team had to piece together documents and facts from government officials, managers and employees. Aside from issues common to neglected companies — not making any money, for one — several not-so-common issues surfaced. Workers’ wages had gone unpaid for months, and payroll taxes were years in arrears. One of the company’s most profitable production lines had been “rented out.” Not only were local competitors using its technology, but some also produced the same capacitors under the China Star brand. The production lines lacked raw materials, and the power bill was huge. It turned out that power at an adjacent hotel was sourced from the factory.

The resolution: They bought the company. The partners agreed that something had to be done about the extra costs but disagreed on what position to take. Nielsen wanted to cut off power and cancel the sublease to the rented production line. But his Chinese partners disagreed. Cutting off power and closing a factory would create ill will among the community.

The lesson: Part of the turnaround process in China included figuring out what the team wanted to do, weighing it with what they could do without offending others, and finding a middle road. Everything the new owners did was sending a message. Did it cost the company money to take time to work this out? Indeed. But the new owners maintained their credibility, and Nielsen came to understand that the cost of his direct approach would be higher than the costs they were trying to cut.

Gerry Yemen and Elliott N. Weiss

Yemen is senior researcher and Weiss is a business professor at the University of Virginia Darden School of Business.

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