• Strategy
  • CFO Asia

When Worlds Collide

The best hope for a foreign investor is a local CFO with a mind of her own.

Fior time immemorial, China has furnished foreign yarn-spinners with tales of epic battles. Now, as capitalism takes hold, a literature is emerging devoted to the conflicts of business. Books such as China Dream by Joe Studwell, and the newly released Mr. China by Tim Clissold—former CFO of Asimco, a company managing many China joint ventures—chronicle no-holds-barred struggles between enlightened capitalists and xenophobic Chinese managers. While they make compelling reading, they can lack the more complex shadings of the local point of view. And they tend to overlook a key player, the Chinese finance professional charged with making the enterprise work.

Xu Saihua’s experience as the foreign-appointed CFO in a Chinese joint venture could have been written by John Grisham, the US bard of corporate intrigue. Her story also highlights the role of an unsung combatant in China’s business culture wars. Xu, a Shanghai lawyer, was tapped by Gale Pacific, an Australian maker of outdoor knitted fabrics, to monitor the finances of Gale’s manufacturing in Ningbo, a city south of Shanghai. She turned out to be the foreign investors’ angel who ensured that the investment stayed afloat in an environment of conflicted loyalties. Says Xu: “I do not really know how I came through,” but she quickly gathers herself and adds: “Looking back, I can see there were conflicts of interest between the two parties, as well as conflicts of principles.”

Xu’s story shows the level of risk that foreign companies undertake when launching a joint venture in China. During her embattled tenure, Gale Pacific bought out the joint venture partner and turned the enterprise into a wholly-owned foreign enterprise (WOFE). A preference for WOFEs, and therefore greater control, reflects the general trend in China, where struggles within joint ventures—and an easing of investment laws—have made total ownership more popular.

But there are still 285,000 registered joint ventures in China, and some multinationals prefer to go this route. One reason may be profitability. McKinsey, the US-based consultant, launched a study last year that found that among the 31 foreign multinationals it polled, each with WOFEs and JVs in its portfolio, the joint ventures had fared better. But the study also found that the ultimate success, whether WOFE or JV, depended on the presence of a local finance officer with the independence to act in the majority shareholders’ interests.”

Lawyer Turned CFO

McKinsey might have added, get a local lawyer like Xu Saihua to be finance chief. Prior to taking her CFO job in Gale Pacific, Xu, 30, was an attorney with a Shanghai firm, specializing in business investment and merger and acquisition advisory work. Gale Pacific was one of her clients. Then, in late 2002, Gale Pacific acquired US-based California Sun Shade.

A private enterprise in Ningbo owned by a local businessman named Lu Xianfeng, 35, was the sole supplier of raw materials to California Sun Shade. (Repeated attempts to interview Lu for a response to this story were declined.) In order to secure a continuous and cheap supply of materials, Gale Pacific’s managers negotiated a JV deal with Lu. In the deal, the Australian side would invest US$1.9 million and own 85 percent of the JV; Lu would invest US$330,000 to take the remaining 15 percent. As a minority shareholder, Lu became a director of the JV, Gary Gale, Gale Pacific’s managing director, became chairman of the board. Gale Pacific also appointed an independent director to balance the board.

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