Why it's hard for Chinese entrepreneurs to let go

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Mention ‘Chinese entrepreneur,’ and the image of a tech-savvy internet entrepreneur usually comes to mind. Think of the founders and current leaders of companies like Alibaba, Tencent, Meituan—to name just a few. In just the short span of a decade or so, they’ve created enormous wealth for themselves, their employees, and their investors. Along the way, they’ve helped lay the foundation for today’s highly digitized economy in China. 

But let’s not forget that since the 1980s, from the earliest days of China’s economic reform and opening up to the world, there have been scores of companies that were founded by China’s first private entrepreneurs. This was really China’s first crop of entrepreneurs who are now entering their 60s and 70s. At the same time, the next generation following them is approaching their 30s and 40s, looking to put their mark on the business world. As a result, these pioneers are increasingly looking at making the transition from the 1st generation to the 2nd generation.

Many countries in the West in particular have a lot of experience making this transition. In China, however, very few companies have had this experience. Why is it especially hard in China? What are some of the challenges that are unique to this market?

The first observation is that very few Chinese entrepreneurs have even done it!  In terms of understanding how to do it, what are the best practices, the protocols, the ‘playbook’ around how to transition in China from the first to the second generation—there are very few success examples one can point to. Maybe we’ll see a Chinese-style generational transition develop, but the fact is, it’s still a very new thing.

Another thing I’ve noticed is that the first generation doesn’t really want to retire yet. Having built their companies from scratch, often with extremely limited resources and in very difficult conditions, Chinese entrepreneurs understandably associate themselves very closely with their companies. Their social standing and identity stem from their business empire. While they might mention transition and retirement every now and then, the reality is, they are serial entrepreneurs “addicted” to the highs of creating businesses. Given the abundance of new opportunities in China, these entrepreneurs simply cannot help themselves.

(Footnote: Of course, there are a bunch of internet entrepreneurs in China who are retiring at an extraordinarily early age. But they tend to be internet companies with more institutional ownership versus private entrepreneurs who have more control of their company.)

The absence of systems also prevents a proper transition. This is not unique to China, but the first generation entrepreneur tends to rely on a generation of managers who grew up with the company. These managers, now in their fifties, never created proper systems and a knowledge base to enable succession and transition. The lack of transparency and institutionalization make it very difficult for the younger generation to take over. Often problems can only be resolved by the founder’s unique credibility and relationships. The personal cult of the founder is often so powerful that institutionalization may feel pointless, or just an afterthought. When a quick chat with the founder can do the trick, there is very little incentive to create processes and governance.

Then there is the readiness of the next generation. The first generation succeeded under very harsh conditions and in a context of scarce resources. It is often difficult for the current generation to fully understand the sacrifices and tenacity of their parents. Perhaps the comparison is often unfair and meaningless, but many first generation Chinese entrepreneurs judge their children based on their own capacities, and often feel that the next generation lack many of the attributes that will reassure them that the business is in safe hands. In fact, they are often referred to in Chinese as “Fu Er Dai”, which means literally “rich second generation”, a term often used derogatorily to characterize their spoiled behavior. Not surprisingly, this often leads to conflicts and frustration among the second generation.

Finally, there’s the sheer ferocity of competition in China. There never seems to be the ‘right time’ for a founder to step away from the business.  It feels like there’s a fresh challenge every day. Every year feels like an existential crisis. Someone out there always seems to want to disrupt the industry and eat your lunch.  The founder never feels secure enough to just ‘let go’, not trusting that the next generation can withstand the intensity of competition. Every year something happens that may cause an entire lifetime of work to go away.

Family succession is a process and a journey. This is universal, but especially challenging in China with some unique Chinese characteristics. A successful transition will likely need both the first generation entrepreneur and the next generation to adapt their mindsets and have honest conversations. The transition also often comes with appointments of younger, and often more professional executives. More transparent management systems and governance need to be put in place. Institutionalizing and sharing of knowledge and relationships will be required. Many of these changes will inevitably affect entrenched vested interests.

The entrepreneurial successes of the first-generation Chinese are well recognized and celebrated. These larger-than-life personalities have been the key success factor of their enterprises. Whether their legacies can last will rest on how well they prepare for their own retirement.  

What do you think? Share your ideas and recommendations in the comments below, and let’s have a conversation around this important topic!

I’m the Managing Partner of McKinsey’s Greater China Region. Please reach out and connect or follow me on LinkedIn. I welcome you to subscribe to my brand-new newsletter, Inside the Chinese boardroom, by clicking the subscribe button. Download a new report that takes a close look at China's reskilling challenge, published by my colleagues from McKinsey's Greater China Region and the McKinsey Global Institute: https://www.mckinsey.com/reskilling-china