Asia

The Amazing Story of China World Stores (Chapter 1: Mr China, Eat your Heart Out)

I’m sorry, but we cannot represent you. Absolutely, categorically, we can’t. My partner in Beijing simply refuses to take this matter on”.

It was around 10am one morning in mid-2007, and I was on the phone with the head partner of the Singapore office of a major international law firm. We had worked together on many transactions over the course of the past five years, and apart from our professional relationship, we had also become friends.

The previous year, I had been responsible for directing more fees to her law firm’s Singapore office than any other client. I was now trying to engage her firm to undertake the legal due diligence review of a Chinese retail business (let’s just call the business in question “China World Stores”). The investment fund I worked for at the time was proposing to make a substantial investment into China World Stores.

The evening before, one of the Australian founders of China World Stores – we will refer to him as “Sam” – had met in Beijing with the law firm’s lead Chinese partner. The meeting was for the purposes of introducing the lawyer to China World Stores’ business, so that he could properly define the scope of the due diligence process (and estimate the fees). Sam had met the Chinese lawyer in the lobby of a smart Beijing hotel. According to Sam, the meeting had been productive and positive, so much so that it had stretched into an extended discussion over a long dinner. The potential investment was a substantial one, on which legal advisers could expect to generate north of a million dollars worth of fees.

I was therefore struggling to understand why this lucrative work assignment was being turned down so abruptly.

I asked: “But I heard the meeting last night went well, and this is going to be a transaction with a huge amount of legal work not just now, but into the future. I don’t get it – why won’t you take on the job?

To which the Singapore lawyer on the other end of the line replied: “Look, I promised I wouldn’t say anything to you, and just decline the job politely. But we are friends, so I will tell you the real reason, although I’d appreciate if you would please keep this just between us. My partner in China refuses to take this matter on because he says Sam made a pass at him, and in these circumstances, my partner refuses to be involved”.

I was stunned. I had thus far spent literally dozens of hours in the company of Sam, getting to know him as part of the process of evaluating whether to invest in China World Stores. We had gone so far as to hire corporate investigators to run background checks on Sam and some of his colleagues. I had also met socially with Sam on many occasions, including a Sunday barbeque with his wife and kids. By all accounts Sam was a very committed, not to mention entirely heterosexual, family man. It therefore sounded really strange that he would make a sexual advance on a Chinese partner of a leading international law-firm, in the public surrounds of a Beijing hotel lobby, of all places.

What? Are you sure?” I asked.

That’s what my partner in Beijing says happened, and he is completely shaken up by it”.

I just can’t believe it. Did he say what happened exactly?” I said, still in shock.

Well, he says that Sam clearly suggested to him that he was interested in a liaison”, my lawyer friend replied.

I cannot believe that Sam would say anything of the sort”, was my response.

Apparently, he didn’t say anything”.

Well, what then?

He tapped his foot”.

Excuse me?”

Sam tapped his foot, which my partner in China tells me is a way that gay men signal interest to one another.

I had no idea how to even respond to this unexpected turn of events. Here I was, trying my best to initiate a multi-million dollar investment into a Chinese retail business, and the whole thing was about to be scuttled at the starting gate, just because someone had tapped his foot inappropriately?

——

Thus begins my part in the harrowing saga of China World Stores, a story of foreign investment in China gone horribly wrong. It is a story which sadly I was deeply involved in from 2006 to 2008, but even today, almost half a decade later, the saga continues, and from time to time, I find I am reluctantly dragged back into it. It is a tale filled from the start with countless twists and turns, and packed with business events which are at times, quite literally, beyond belief.

Whenever I have told people snippets of the story they have invariably responded: “this is better than Mr China – you should write a book”. So, I am doing just that. From time to time, I will write the next chapter and publish it via this blog. I hope you enjoy.

However, first I might make a few cautionary observations:

  1. All names, places and other identifying information have been changed. Not to protect the innocent, but to protect my own arse. There are court cases still running in three different countries as a result of the China World Stores saga, and the last thing I feel like is to get sued, again (we will get to that in due course….).
  2. However, I do know that truth is the best defence. And no matter how strange the story of China World Stores may seem at times, I swear that every word I write is true. If I hadn’t lived it, I wouldn’t always believe it myself.
  3. I will try to avoid the intricacies of the investment transaction itself, and other areas of contention that, as I mentioned, are still the subject of a slugfest in various court-rooms around the world. Instead, I will focus my attention on the events surrounding the investment in China World Stores – the oddities that illustrate what doing business in China can really be like, and which should cause any sane person considering investing into China to at least first pause and have a really, really stiff drink.

—–

Let’s start at the beginning.

In 2004, I relocated with my family from Australia to Singapore. At the time I had been promoted to the position of a Managing Director at the Australian investment firm I worked for. My relocation was ostensibly to allow me to open an Asian office for our firm, so that we could participate in the great investment opportunities that the Asian gold-rush afforded.

And this meant I needed to become familiar with China. How could 1.2 billion Chinese consumers, clawing their way up the wealth ladder, be ignored? How could China be anything other than the greatest money-making opportunity of all time for savvy Western capital providers?

Well and truly a convert to the limitless get-rich-quick possibilities afforded by the Middle Kingdom, I began making regular visits to China. I spent many months trying to familiarise myself with Chinese customs, business practices, laws and regulations. My aim was to meet people and develop a local network, and to come up with a “China strategy” that would guide our firm’s approach to what is a vast and complex marketplace.

And all the while, my eyes were wide open to opportunity. The roads in China were supposedly paved with gold, and I, like every other foreign money guy running around in Beijing and Shanghai, was keen to stake a claim.

—–

After I had been kicking around in China for about a year, a colleague gave me a copy of a book called “Mr China”, written by a fellow named Tim Clissold and published in 2005.

The book – a true story – describes a period of time from 1993 to 2002, during which Tim worked for “Pat”, the head of an American investment bank in China. In the early 1990’s, Pat had raised a US$400 million investment fund on Wall Street that was earmarked solely for investing in what was then considered to be the nascent Chinese economic miracle.

The book details Pat and Tim’s adventures as pioneer foreign investors in China, while they hunted down investment opportunities across the country. Their “China strategy” was to focus on finding traditional state-owned manufacturing businesses, which at that time were rapidly being privatised and commercialised, and buying them up on the cheap. The “investment thesis” was that with a more commercial focus and access to modern business practices, the profits of these companies could be rapidly increased.

One problem was that such state-owned businesses tended to be located in the boondocks of China, and thus in order to find the investment opportunities, Pat and Tim spent months travelling through unheard of parts of China that few foreigners had, at that time, ever been to. Ultimately, they succeeded in invested the bulk of their fund into a motley assortment of over twenty formerly state-owned Chinese factories, that were involved in producing everything from brake pads to beer.

In Mr China, I read about the crappy roach-infested hotels in the backwoods of China in which Pat and Tim had stayed, and which I had just started to experience for the first time myself as I began to venture further afield in China, away from the comfortable surrounds of Beijing and Shanghai. I also read about the weird foods Pat and Tim were required to eat at business banquets (steamed rabbit ears, anyone?), not to mention the endless consumption of baijui that was almost mandatory at all business events – again, both aspects of Chinese business practice that I was now being exposed to first-hand (see my previous post Mimouna and the Curious Case of Doing Business in China).

But Mr China became an instant best-seller not for its tales of strange food or vivid descriptions of the hardships of life on the road in China. Rather, the world at large found Mr China fascinating because it laid bare a litany of Chinese business shenanigans, which were often so extraordinary as to be almost comical, and which to me seemed to evidence a widespread attitude in Chinese business circles of “let’s fleece the foreigner”.

Thus I read for the first time about the extent of corruption in the lower ranks of Chinese officialdom; about forged documents and fraudulent letters of credit; about a Chinese businessman who opened a competing factory literally next door to that of their supposed foreign partner in flagrant breach of every clause of a written contract.

In one Mr China story, US$58 million vanished from a Beijing brewery’s bank account shortly after the brewery was acquired by Pat and Tim’s fund. In another story, Tim describes how a factory manager disappeared with $5 million cash, only to later be located in Las Vegas (not to mention the added insanity of the anti-corruption official approached to investigate the incident requesting a cash payment and a car to do so….).

It goes on. Mr China tells of business disputes being settled with fist-fights and broken bottles, and of workers demanding their rights via factory riots. It tells stories of lying and cheating and business practices so completely foreign to anyone raised in a Western corporate culture that they are both morbidly fascinating and terrifying at the same time. There is even an account of how one especially problematic business deal resulted in a severed ear….

And of course, Mr China overflows with the ultimate opium for investment folk everywhere – the perverse pleasure of being able to read about how other people lost a fortune. The events described in the book ultimately led to an almost complete wipe-out of Pat and Tim’s fund, not to mention Tim eventually suffering a heart attack as a result.

Mr China quickly became an essential manual for anyone investing in China, or even thinking of doing business in the country, and it attained an almost cult-like status seemingly overnight. I think I must have read it at least a dozen times, making copious notes in the margin, and all the while thinking “that could never happen to me”.

In fact, with hindsight, I realise that all the while what I was really thinking was: “that could never happen to me, because this can’t seriously all be true”. I am sure many people who read Mr China must have thought likewise – some of the events described are so fantastical that I assumed some parts of the book were semi-fictional, with the author taking a few artistic liberties for the sake of making his story more entertaining.

And that, perhaps, was my first big mistake. As the China World Stores debacle taught me first-hand, every word in Mr China is, unfortunately and bizarrely, absolutely true.

——

I wasn’t thinking about all this, of course, as I hung up the phone that morning with my lawyer-friend in Singapore. My mind was more focused on how to resolve the problem at hand, and so I immediately called Sam and, rather politely, asked him: “what the fuck did you do?

Sam of course said that he had not made a pass of any sort at the Chinese lawyer, repeatedly expressed his complete shock at the “unfounded allegations”, and reminded me that he was married and decidedly straight.

What followed was an almost farcical series of shuttle-diplomacy phone calls between me and Sam, me and the lawyer in Singapore, and me and the lawyer in Beijing, as I tried to first understand the facts, and then mediate an outcome.

It turns out that what had offended the lawyer in Beijing was the fact that Sam had, for the duration of much of their meeting and dinner the night before, been jiggling his leg. Apparently, on several occasions, Sam’s foot had even made contact with the lawyer’s foot under the table.

Now, according to Sam, jiggling his leg and tapping his foot was just a nervous habit – a way of releasing energy – and I was sympathetic, because I tend to do the same thing as well. According to the lawyer in Beijing, however, this was a universal signal that gay men use to indicate their interest.

Further investigation identified the source of this strange assertion. It turned out that at around the same time a scandal raging in the USA had received widespread coverage in China. The scandal involved Senator Larry Craig, who had resigned from office after being arrested for lewd conduct in the men’s toilet at the Minneapolis airport. Senator Craig had supposedly solicited sex from an undercover police officer, and one of the key allegations was that the Senator had entered the toilet cubicle adjacent to that occupied by the policeman, and proceeded to repeatedly tap his foot on the floor, including at times brushing his foot up against that of the police officer in the neighboring stall.

Why this could only mean the one thing – that the Senator was seeking to have sex with the guy in the adjoining toilet cubicle – is beyond me, but clearly Senator Craig thought it sufficiently serious enough to resign over, although he did say that it was all a misunderstanding, due to the fact that when he pooped he adopted a “wide stance”. I mean, really. Only in America could this happen.

Having got to the bottom of things (pardoning the pun), I managed to broker a telephone conference between Sam, myself and the Beijing lawyer, where apologies were made, the air was cleared, everyone laughed at what was now being described as a “cultural misunderstanding”, and later that afternoon, the law-firm agreed to take on the assignment.

So, we were back on track. I had successfully grappled with the first of many entirely unprecedented problems that the investment in China World Stores would throw my way over the next few years: in this case, what to do when the founder and managing-director of a potential investee company allegedly makes a sexual advance on your potential legal adviser. In law school and business school they may teach you how to handle a lot in things, but this is just not one of them. Although frankly, I wish they had. And I wish that what they had taught is that when confronted with allegations of foot tapping in a Beijing hotel lobby, however baseless, turn around and get the fuck out of dodge as fast as you can.

——

First Rules for How Not to Do Business in China:

  1. Read Mr China. Believe Every Word. Be Very Afraid.
  2. Don’t Tap Your Foot.

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