Evolving with the times while navigating a competitive environmentFamily businesses in China and Hong Kong

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2016 Global Family Business Survey

IntroductionThe Global Family Business Survey which is conducted by PwC every two years explores the trends in family businesses globally, in terms of challenges, business goals, internationalisation, family involvement and succession planning. The 2016 Global Family Business Survey was conducted between May-August 2016 and covered 2,802 family businesses with a sales turnover above USD 5 million across 50 countries.

This overview contains the key findings from China and Hong Kong, presenting the views of 100 family business senior executives in the two territories (48 in China and 52 in Hong Kong). In terms of sector distribution, manufacturing accounts for 47% of the sample in China compared to 37% of the sample in Hong Kong. In the China sample, retail accounts for 11% of the sample and real estate accounts for 9%. In the Hong Kong sample, wholesale accounts for 15% and transport accounts for 13% of the sample.

Despite the influence and economic contribution of global corporations, family businesses have significant market presence in terms of job creation and contribution to GDP. According to Tharawat magazine’s 2014 study on the Economic Impact of Family Businesses, 85.4% of China’s private enterprises are family owned, generate 65% of the country’s workforce and account for 65% of GDP. The same study showed that in Hong Kong, 60-66% percent of the private sector is accounted for by family businesses. Another study showed that in Hong Kong the top 15 families control assets worth 84% of GDP.

As the Chinese economy experiences a transformation from the previous state-led manufacturing-based model to a new one driven by consumer demand and the service sector, the manufacturing based family businesses that flourished in a previous era are having to find new avenues of growth. Several PwC studies show that megatrends such as technological breakthroughs, climate change and resource scarcity, urbanisation, demographic and social change are having disruptive impacts on businesses and family businesses are not exempt.

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Main insights

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Growth over the last 12 months and growth aims over the next 5 years

• Chinese family businesses FBs have seen a fall in performance over the last financial year as 73% of surveyed FBs have seen sales growth in 2016 compared with 84% in 2014. Over the same period, 27% recorded a sales decline.

• Compared to survey results two years ago, there is an upward trend in proportion of Chinese FBs whose aim is to grow steadily versus to grow aggressively. For example, 65% of Chinese FBs aimed to grow steadily in 2016 compared to 41% in 2014.

• The proportion of Hong Kong FBs who have seen sales growth over the last financial year have remained consistent although a higher proportion (44%) of surveyed FBs have seen a sales reduction in 2016 compared with 33% of them in 2014.

• For Hong Kong FBs, in terms of growth aims over the next 5 years, the trend of steady growth holds.

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Growth strategy and financing growth • In terms of growth strategy, a higher proportion of Chinese FBs are

planning to grow their core business in existing markets and, to a lesser extent, by expanding into new markets and new sectors.

• Among those Chinese FBs expecting to grow by 10% or more, the vast majority (93%) will use external financing to help fund this growth compared to the global average of 78%.

• In Hong Kong, growing core business in existing markets is the key means of achieving growth for 85% of the surveyed FBs; around half plan to enter new markets.

The following is an overview of the main findings of the family business survey in China and Hong Kong. It provides clarity on how family businesses in China and Hong Kong are navigating the new commercial environment, what their priorities might be, and how responsive they might be to new trends and influences to ensure their competitiveness and preservation of their wealth.

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Importance of personal and business goals over the next 5 years

• In terms of respondents’ personal and business goals over the next five years, half of the Chinese FBs wanted to ensure the long term future of the business, improve profitability and one-third wanted to attract high quality skills into the business and run the business on a more professional basis.

• Improving profitability and ensuring the long term future of the business are the key goals for FBs in Hong Kong.

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The main challenges facing family businesses over the next 5 years

• The key challenges over the next five years among FBs in China are the need to innovate, competition, the general economic situation and attracting/retaining talent. Notably, the continual need to innovate is being recognised by Chinese FBs as a top challenge over the next 5 years as this year 73% cited it as a challenge compared to 66% in 2014.

• The key challenges over the next five years among FBs in Hong Kong are the general economic situation (60%), the need to innovate (56%), attracting/retaining talent (52%) and the increasingly international environment (52%). Notably, the increasingly international environment is preoccupying the minds of Hong Kong FBs as this year 52% cited it as a challenge over the next 5 years compared to 23% in 2014.

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Market conditions dominate the main challenges facing family businesses over the next 12 months

• The main challenges facing Chinese FBs over the next 12 months are market conditions, company re-organisation, staff recruitment and competition.

• It is interesting to note that compared to two years ago, a lower proportion of Chinese FBs cite professionalisation and containing costs as key challenges over the next five years.

• Market conditions, currency/exchange rates and recruiting talent are the key issues facing FBs in Hong Kong. Market conditions was the key challenge cited by 75% of survey of family businesses in Hong Kong.

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Business diversification and direction of business in 5 years’ time

• In terms of current business diversification, 29% are engaged in one sector in one country and another 29% are focused on one sector in multiple countries. In terms of future direction of the Chinese FBs in five years’ time, 75% are planning to hire non-family professionals to run the business and over half of them plan to establish new entrepreneurial ventures and sell in new countries.

• In terms of current business diversification, over half of FBs in Hong Kong are engaged in one sector but across multiple markets. In terms of business direction in the next five years, 62% said they will earn their revenue from their current core business products/services, 50% are looking to hire non-family professionals, 42% will establish new entrepreneurial ventures and sell in new countries.

Internationalisation• Almost 80% of FBs in China currently export their goods or services (up

from 66% in 2014) and in five years’ time, the proportion in international sales will increase to 88%. Within five years, foreign sales in China is expected to increase from 26% to 35% of its turnover.

• Three quarters of FBs in Hong Kong currently export their goods or services (down from 83% in 2014 but still higher than the global average).FBs in Hong Kong currently achieve around half of their turnover from foreign sales and this looks set to continue over the next five years.

• Consistent with the global average, the key considerations when choosing new export markets among FBs in China and Hong Kong are economic and political stability followed by the size and growth potential of the country.

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Family businesses preserve family values and reputation

• In terms of how FBs differ from non-FBs, majority of FBs in both China and Hong Kong believe they have stronger cultures and values; they are more entrepreneurial, decision making process is more streamlined and quicker than non-FBs.

• Compared to non-FBs, higher proportions (than the global average) of FBs in China and Hong Kong face disadvantages as they report having to work harder to recruit/retain top talent and to access capital.

• In terms of strengths and weaknesses of FBs in China, approximately two-thirds believe they offer stability to the economy, look after their staff even in the bad times and support community initiatives. Yet, nearly half think they are less open to new thinking and ideas.

• 56% of Hong Kong FBs recognise that they support employment even in the bad times. Two-fifths feel that FBs are less open to new thinking and ideas.

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Succession planning is weak• Only 10% of FBs in China and Hong Kong have a robust, documented and

communicated succession plan in place (lower than the global average of 15% but higher than the proportion in China in 2014).

• In 2016, there is an upward trend in FBs in both China and Hong Kong who are inclined to pass on ownership but bring professional management into the firm compared to 2014. For example, 43% of FBs in China plan to pass the business ownership but not the management onto the next generation, an increase of 15 percentage points from 2014. 31% of Hong Kong FBs want to pass on ownership but bring professional management into the firm, an 18% increase from 2014. In Hong Kong, there has been an appreciable decline of 12 percentage points in proportion of FBs in 2016 who plan to pass on management to next generation.

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Family involvement and alignment • Just over half of Chinese and Hong Kong FBs claim that the family and the

business strategy are completely aligned (lower than the global average). In China, over a quarter admit to misalignment whereas in Hong Kong a fifth admit to misalignment.

• 71% of FBs in China have next generation family members working in the business, on par with the global average (69%) whereas 44% of FBs in Hong Kong have next generation family members working in the business.

Managing differences is key• 77% of Chinese FBs have at least one procedure/mechanism in place to

deal with family conflict (slightly lower than the global average of 82%).

• 69% of FBs in Hong Kong have at least one procedure/mechanism in place to deal with conflict. While this is lower than the global average, it represents a large increase since 2014 when only 48% of Hong Kong FBs had at least one procedure in place.

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Professionalisation of the board is key • Non-family involvement in FBs in China is much higher than their global

counterparts. 90% of FBs in China have non-family members on the board compared to 52% in Hong Kong and 65% globally. 83% of Chinese FBs have non-family share ownership of the business compared to 54% of surveyed Hong Kong FBs and 33% globally.

Chinese family businesses recognise the importance of digital

• 67% understand the tangible benefits of moving to digital and have a realistic plan for measuring them (higher than the global average of 59%). Compared to their global counterparts, Chinese FBs are also more likely to agree that digital is integrated within their business’s culture and that they have a strategy fit for the digital age.

• Merely 19% in China compared to 33% in Hong Kong believe that they are vulnerable to digital disruption.

• 56% of FBs in Hong Kong recognise the importance of digital, although fewer feel that they have a strategy fit for the digital age and/or that the business has digital integrated within its culture (versus the global average).

• 60% of respondents in China and 54% in Hong Kong have discussed the topic of digital disruption at board level.

• Half of them in China compared to 37% in Hong Kong are prepared to deal with cyberattack or data breach.

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Implications of the findingsThis report is very timely as the evidence from the survey confirms that family businesses are economic powerhouses and are having to navigate the same challenges of megatrends and intense competition in the marketplace that non-family businesses are having to navigate in order to ensure their competitiveness, relevance and sustainability.

The owners of family businesses have to provide stewardship for the family business through an evolving commercial environment and changing expectations of stakeholders, by becoming more open to global trends and outside advisors, by adapting to innovations and best practices and by diversifying the business.

In addition to evaluating the business direction, family businesses are also under pressure to navigate intergenerational expectations of values, governance, reputations, and legacies. This is a complex subject as the survey shows a low proportion of family businesses have a succession plan in place which suggests that the older generation is not ready to let go. After all, a family business represents a substantial emotional attachment. Therefore, a smooth transfer of ownership requires not only preparing the next generation to succeed but it simultaneously requires preparing the older generation to emotionally and financially let go.

We hope that this overview confirms that family businesses in China and Hong Kong are progressive and are evolving with the times. They have similar concerns about market conditions and how it impacts their growth as non-family businesses. Traditionally, while family businesses have been conservative and averse to risk, there is a growing recognition of the importance of being entrepreneurial, embracing innovations and creating positive social impact as a core value proposition.

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Methodology and sample profile for China and Hong KongFor the purposes of this survey, a ‘family business’ is defined as a business where:

1. The majority of votes are held by the person who established or acquired the firm (or their spouses, parents, child, or child’s direct heirs);

2. At least one representative of the family is involved in the management or administration of the firm;

3. In the case of a listed company, the person who established or acquired the firm (or their families) possess 25% of the right to vote through their share capital and there is at least one family member on the board of the company.

The survey was conducted between May – August 2016 and sample size for China was 48 and for Hong Kong it was 52. In terms of the sector distribution, manufacturing accounts for 47% of the sample in China compared to 37% of the sample in Hong Kong. In the China sample, retail accounts for 11% of the sample and real estate accounts for 9%. In the Hong Kong sample, wholesale accounts for 15% and transport accounts for 13% of the sample.

In terms of the distribution of the sample size by firm revenue, 30% of the sample firms in China and 37% of the sample firms in Hong Kong have revenue between USD 101-500 million, 20% of the sample in China and 12% of the sample in Hong Kong is constituted of firms with revenue between USD 51-100 million and 13% of the sample firms in both China and Hong Kong have revenues less than USD 10 million.

In terms of respondent profile in China, 71% were family members; 33% of them were CEOs of their family businesses and 25% were a board member. In Hong Kong, only 33% of respondents were family members and the breakdown shows that non-family respondents were over-represented in the sample, with over half of the respondents being finance directors and 29% being a board member. In terms of the age distribution of the sample respondents, average age in both China and Hong Kong was 44 years. In China 35% were in the 45-54 age range and in Hong Kong 42% of respondents were in the 35-44 age range. In China 81% of respondents were males whereas in Hong Kong 62% were males.

In terms of demographics of the sample composition, the Hong Kong sample is mainly represented by non-family respondents and 52% of the respondents are second generation. The China sample is over-represented by family members and 50% of respondents are first generation and 44% of the respondents are second generation. The China sample is more male dominated compared to the Hong Kong sample. Both samples are dominated by manufacturing firms and the average revenue of sample firms in China was USD 245.9 million compared to the average revenue of sample firms in Hong Kong which was USD 156.7 million.

For more details on the global trends of the family business sector, please refer to the full report The ‘Missing Middle’: Bridging the strategy gap in family firms at www.pwc.com/fambizsurvey2016.

www.pwchk.comThis content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. CN-20161025-3-C1

AcknowledgementThe editorial, writing and project management were carried out with the support of Marketing and Communications Thought Leadership team.