Robert Kuok on Opportunities in China

 

         All the passages below are taken from the book “Robert Kuok---A Memoir” written by Robert Kuok with Andrew Tanzer. It was published in November 2017.

 

OPPORTUNITIES IN CHINA

 

OUR BUSINESS IN CHINA really started in earnest around 1982. We started when I was almost 60, when many people are already thinking about retirement, and we have now been going for over 30 years.

I have spent many thousands of hours with many hundreds of people from all over the country, and generally I have found that those who are responsible for commercial matters are very understanding of the needs of business. However, in the initial years, there was a steep learning curve. I had to learn the ropes of how to do things in China, and there were several years of false starts and difficulties. Even as an ethnic Chinese, I found it very complicated to deal with the authorities in China, so I can appreciate how difficult it is for a non-Chinese businessman, even if he knows the language.

The authorities in Beijing knew about my involvement with the Shangri-La Hotel in Singapore. I believe that Lim Kai, my early partner in trading with the mainland and a true friend of China, recommended me to them in strong terms. One day in 1977, Lim Kai passed on the message that China Travel Service was keen to have my help to build hotels in China. I vividly remember flying north on the morning that my daughter Hui was born in Kuala Lumpur.

Most of the existing hotels in China did not qualify for even one star. The bathrooms had filthy toilet bowls and cracked washbasins; the rooms came with lamps minus lampshades. To a lot of Chinese, working in a hotel was a menial job. Under communism, why should you be a servant to anyone? Why would you demean yourself by serving someone a cup of coffee? As a result, the hotels in China were among the world's worst hostelries.

On 12 November 1977, I flew to Beijing from Guangzhou. Transportation was difficult then; there were few flights between the major cities. Something that would take two days to accomplish in Malaysia might take two weeks or two months in China. You could never line up six or eight meetings in one day. Someone would come and meet you at your hotel, spend an hour or an hour and a half with you, then for two days you met no one.

After Beijing, I went to Shanghai and saw a nice, three-hectare piece of land near where Suzhou Creek flows into the Huangpu River, the site of the former British Consulate General. I also went to Guangzhou and met the authorities there to review possible sites for a hotel.

I soon realized that I was meeting the wrong crowd. Other investors had gone in and met the Beijing City Government or Guangzhou City Government. I had foolishly assumed that under the communist regime there was one employer, one government. I later discovered that in China a single individual's authority can be enormous. China Travel Service may have been responsible for tourism and they may have operated a number of hotels, but they did not have the authority to grant final approval.

I eventually signed a letter of agreement with China Travel Service to build a hotel in Shanghai. I lined up a Hawaii-based firm to design a huge, 1,300-room hotel. We were going to move fast, given the pressing need.

Then the Shanghai City Government came to me and said, "You have to lend us US$50 million because the infrastructure is inadequate. To provide water, waste facilities and electricity, we need to improve the infrastructure, and we are short of funds."

If it were just a closed-ended US$50 million loan, I might have been persuaded. But anybody with common sense knew that Shanghai had been a series of foreign concessions. You had the British settlement, the French settlement and the Japanese area; thus, the infrastructure under the roads was not homogeneous. What if they started tinkering and US$50 million expanded to US$200 million? How did they arrive at that figure of US$50 million in the first place? Where does a pipe or a cable end? I was very worried that I would not see the end of it. But the Shanghai authorities made it clear that unless I was willing to extend the loan, I would not get approval to build the hotel.

So, I told them, "Sorry, I cannot make that commitment." They conceded that they had broken the agreement, but I did not pursue it. It was a valuable learning experience. I had my out-of pocket expenses and I had to compensate our architect, but it was all manageable.

In about 1982, I took a group of friends to Shanghai. The then mayor, Wang Daohan, invited me to breakfast at the former French Club. As soon as I sat down to breakfast, Mayor Wang began to apologize for the City's failure to honour the signed hotel agreement. I said, "Mr Mayor, please do not apologize. It is not an important matter to me. The cost was minimal. I feel very embarrassed that a person of your importance should have to say these words to me."

The years 1977 to 1981 were terribly frustrating for me in China. Every time I thought I was near success, I would run into another brick wall. China was crying out for development and in urgent need of foreign investment, yet the people I was dealing with put on all kinds of stupid airs. I met a lot of third-rate officials. But, looking back, I really cannot blame them; it was the early days of reform, and it took a really exceptional individual to break the mould and try something new

One day, my friend Ho Yeow Koon of Singapore came to me and said, "You know, I think I've got a deal for you. They need someone to renovate and modernize a very elegant but run-down hotel in Hangzhou. Many of the state guests who visit Beijing or Shanghai are put up there for one or two days to enjoy the beautiful environment of West Lake." He was referring to the famous Hangzhou Hotel, which commanded a unique site overlooking West Lake.

I travelled to Hangzhou, one of the most famous resort cities in China, and met the officials in charge. Finally, I succeeded in entering my first hotel venture in China. I signed a contract to renovate the hotel, and we put in US$20 million in cash equity, for which we received a forty-three or forty-four percent stake in the hotel. It was 1982, and I felt I was making quite a sacrifice to commit US$20 million, which I otherwise could have invested in the then-booming Hong Kong real estate market for a quick profit.

We learned some things the hard way in Hangzhou. As elsewhere in China at the time, urban housing was run down; pipes burst and water supply was irregular. Many of the provincial and city cadres and bureaucrats (Hangzhou is the provincial capital) would check into Hangzhou Hotel because it was known to be better maintained. They were used to receiving free rooms and maybe a free meal or two at the hotel restaurant.

Kuok Brothers run hotels as a business. We weren't told anything about these practices and, to preserve face, the local officials were ashamed to inform us. They just expected us to know and to extend the same privileges. We didn't. After all, we had spent US$20 million and were trying very hard to raise room rates, so that we could break even and start to make money. These local practices were draining away resources and interfering with management discipline. We had enough trouble on our hands, what with preventing petty theft inside the hotel and other legacy issues. It took us about 18 months to renovate the hotel, and quite some time after that to root out all the old practices.

Our first hotel in China was Beijing Shangri-La, to which I had committed at the end of 1983. We built the hotel in the educational district of Haidian, in northwest Beijing, where Peking and Tsinghua universities are located. I agreed to invest US$72 million to complete the project on a fully furnished, virtually turnkey basis for the joint venture partners. Our stake in Beijing Shangri-La was about 45 percent.

There was an old hotel next door with about 150 rooms. Our people stayed there and quickly discovered that many of the materials there were highly flammable. If that hotel ever caught fire, everybody inside would be roasted within minutes. We spent over US$3 million to replace all the flammable materials - we couldn't have a disaster on our doorstep!

The China World Trade Center in Beijing was also under negotiation at that time, although we were not part of the talks. The two foreign groups originally competing for the project were led by Chase Manhattan Bank and Industrial Bank of Japan. In 1981 or so, the Ministry of Foreign Economic Relations and Trade (MOFERT) picked Chase as its partner to develop the site, the largest property project in China at the time.

Then, suddenly, everything stopped. Deng Xiaoping was still consolidating power and there was a bit of jockeying for influence within the top leadership. The old guard attempted to block the project, deriding the foreign role and claiming that the project was too grand for a socialist nation.

At least one year passed, and Lim Kai came to me one day with news that a decision had been made internally to re-start the China World project. But instead of bringing in a foreign bank as a partner, they wanted to see who else may be interested in submitting a bid. Lim Kai's contacts had seen my faith in China when I built the Beijing Shangri-La Hotel. They asked Lim Kai, "Would your partner be interested in taking on this project?" When I expressed an interest, MOFERT assigned Luo Baoyi and Feng Tianshun to talk to me.

I had kept about US$90 million in cash with Bangkok Bank in London and New York, waiting for the day when I could go into China in a big way. With gearing, I calculated that I could probably tackle a US$300 million project. We came in as a dark-horse, submitted a bid, and won the race.

The China World Trade Center negotiations began in the second half of 1983. I rented a two-module suite on an annual basis in the old wing of the Beijing Hotel. Three senior cadres from MOFERT came every day to meet with Lim Kai and me. The five of us talked from nine every morning until seven at night. If I develop lung cancer one day, it will be due to this negotiating experience! The hotel suite was transformed into a smoking room: the cadres and Lim Kai puffed away all day long.

I signed the contract in the Great Hall of the People in 1984. The entire project cost was supposed to be US$300 million - US$200 million of that amount borrowedd money. We formed a company with a paid-up capital of US$100 million, of which we put in US$50 million for 50 percent ownership. I recall that Mother didn't agree with my investment in the China World Trade Center. She urged me not to be so hasty. But one good thing about Mother, she knew that I was a strong enough son to disagree with her on occasion.

In China, every contract says the China party is Party A. So we were Party B. But the contract stated that Party B was to take leadership of planning, construction and management, because they accepted the fact that we had the capability. They asked if the Chairman could be Lei Renmin. He was Deputy Minister of MOFERT at the time that I signed the agreement with him. I agreed.

Then, at the first board meeting, Lei asked if the Managing Director could also come from his side. I again gave way. To me the logic was, if they start to ask for it and I say no, it will only lead to tension and stress. They must have talked internally and come to a consensus, like good bureaucrats. If I defy them, what good can come of it? I'm entering their home to do a project - they're not entering my home - so I needed their friendship for smooth cooperation. So I gave way, gave way, and gave way, and all along we worked and worked and made sacrifices. We are very much hands-on managers, not business whiz kids.

I sent in Ang Keng Lam from our side. If we paid him HK$150,000 a month plus bonus, we charged at most HK$50,000 to China World Trade Center, even though he spent 99 percent of his working time on the project. So we subsidized everything, quietly, without asking for credit.

Along the way, the Chinese side brought in a man from Capital Steel Works called Feng Zhicheng, who had gone to some of the best schools in China. He recruited some retiring director-generals from the Ministry, one of whom also always wore a smiling face. Then I began to hear some awful sounds.

The officers from the Chinese side would come to Hong Kong and, as is my style, I gave them a proper lunch or dinner. After that, I left them to look after themselves; not because I didn't want to see them, but because I really was too busy with my own work. I made sure, however, that all their meals were taken care of, and that they were put up in Kowloon Shangri-La. I didn't realize that I had offended some of them; or to put it another way, I had failed to win their hearts and bellies.

Then the rumblings started within the China World Trade Center organization. The divisional and departmental heads would appear to be very cooperative; but these same people would go around backbiting. They'd say, "Oh, such and such a person has been giving away our national treasures to Mr Kuok." In effect, they were accusing me of profiteering at the expense of China.

The first time I heard this story, I told the man who conveyed the rumour to me, "Come on, don't tell tall tales. It's all rubbish. You must have heard wrong. I mean, these guys are smiling in front of me all the time."

Then the murmurings grew so loud and the backbiting so vicious that I realized I could no longer afford to ignore them. At dinners in Beijing, I usually entertained city bureaucrats to make sure that approvals were smooth and that they understood we were forthright, proper businessmen. After dinner one evening, I rushed back to my dingy room in Beijing Hotel and met with Ang Keng Lam. I was seething with anger, and asked for pen and paper. I wrote nonstop for one-and-a-half hours. I wrote a six-page letter in English that began: "Dear Minister Zheng Tuobing." Around midnight, I asked Ang Keng Lam to take the letter down to the photocopying machine, make a copy and keep it.

The next morning, I was playing golf with Minister Zheng at Ming Tombs Golf Course outside Beijing. It was winter, so I wore a coat. I folded the thick letter and put it in the inner pocket. After two holes, I could not contain my anger any longer. I said, "Minister, you are looking at a very unhappy man today."

He responded, "Why are you upset, Mr Kuok?"

I said, "Your old secretary-generals are accusing me of stealing national treasures. They gossip far too much. Mr Minister, I know you understand English. I cannot write a decent Chinese letter. If there is any part you do not understand, please have it translated." I pulled out the letter and gave it to him.

In the letter I said very clearly, "Buy out all my shares at cost plus interest; interest negotiable. I want to pull out of China." I was that upset.

The Minister kept urging me to cool down. I was very rough, even sarcastic. I said, "Minister Zheng, is your country poor or rich?" I didn't say "our country." He was taken aback and didn't answer. I continued, "I'll answer for you. Your country is poor. Therefore, what treasures do you have for me to rob? I came to help, and I have laboured hard. You should not talk behind my back. Please buy me out right away. I want to pull out."

They asked Vice-Premier Gu Mu to see me four months later - this was 1987, at the time of the topping-off ceremony, to plead with me. In that bare-walled, windowless China World building, Gu Mu and I sat two metres from each other across a long table. He said: "Mr Kuok, the attitude and ability of China's bureaucrats is very uneven today. There are still many pockets of ignorance. Please bear with us. We know that you have worked hard and expended your own blood and sweat on this project. All of us in China know it. It would be a great shame if you withdraw now, when you are just about to reap the fruits of your labour. Listen to my urging. Please, Mr Kuok, don't withdraw now."

Fortunately, we remained in the China World Trade Center project, which at today's property prices is worth well in excess of US$1 billion, making the project one of the best investments anybody has made in China. But, at the time, neither party was driven by profit. Of course, as a businessman I would not have allowed the project to operate at a huge loss, but more fundamental was my sense that development in Beijing was about to take off and this project would help launch that takeoff.

At the time, it was truly a massive undertaking, with more than 400,000 square meters of modern buildings including four levels of underground parking, We built two hotels simultaneously within the complex, China World and Traders Beijing, about 150 metres apart.

Tiananmen Incident in June 1989 delayed construction by about eight months and raised costs by a few tens of millions of' US dollars. But we hung on. I was still a raging bull in China after Tiananmen. I remember telling then-Beijing Executive Vice Mayor Zhang Baifa, "You are now going to suffer for about three years. But after three years, you will be forgiven and things will be forgotten."

I believe the success of China World Trade Center, the largest Sino-foreign real estate joint venture up to that date, had a strong demonstration effect on Hong Kong property developers. While a few had invested in China early on, the floodgates opened after the success of the China World Trade Center.

And I also learned from this project. I saw that the good leaders in China far outnumbered the poor ones, especially at the top levels. As long as I see that in a society, then I'm willing to help. When I saw what Deng Xiaoping was doing, I virtually worshipped the man. I have often told overseas friends that, throughout China's 5,000-year history, there has rarely been a period when the leadership has been as committed to providing for the people and nation-building as that since Deng came to power. It has now been more than 35 years since Deng set the country on its current course, and the present leadership continues to put the people first.

We met obstacles and small-minded people in China. Some think you have come to rob them; others just think about themselves, and when you won't line their pockets they turn their backs on you. In some of the provinces, you meet bigoted, narrow-minded officials who are envious before they have given away anything. All you can do is to avoid those places.

Overall, I think my relative success has been due to my willingness to give way. If you were operating in Singapore or Hong Kong, you would not meet with that situation. In China, I was willing to flow with the currents. I was not expecting to make a fortune. I think, in the main, I felt I was there to help the country. But because of all my years of business training and sense of fiduciary values, there were times when I could not compromise. If they were not willing to be reasonable, I could not accept it, and those frustrations sometimes got to me.

Rather than quit the scene, I would just give way. Sometimes, we walked away from projects after expending blood, sweat and money. But more often than not, we tackled the problems and fought our way through. I think I can rightly say we have never compromised with venal officials. You must stand on your principles and be prepared to walk away from a deal if there's a whiff of corruption.

I'll give one example from Beijing. This happened in the early 1990s, not long before the downfall of Party Secretary Chen Xitong. I first met Chen in 1984 when I went to Beijing to undertake the China World Trade Center project. He was then mayor of the city; several years later he was promoted to Party Secretary. Before his downfall, Chen organized a delegation of 399 Beijing bureaucrats to visit Hong Kong. At the last minute he cancelled and let a few vice mayors lead the group.

One of the vice mayors, Zhang Baifa, was already a good friend of mine. He was quite determined that my group of companies should try to obtain and develop a huge piece of land right next to Beijing Railway Station. He was grateful that we had come into Beijing when nobody else was willing to do so, and had invested as much as we did in the China World Trade Center.

Ang Keng Lam, who directed our China real-estate projects, ironed out most of the points with the Chinese side for the deal. The Chinese side in the project was a property development company belonging to the Beijing Municipal Government. There was a general manager named Huang or Wang in charge. My limited dealings with the man, and Ang Keng Lam's more frequent contact, told us that he was not a good partner. I thought, "Oh my God, how are we going to live with this man?"

Nevertheless, we signed a basic agreement at the Island ShangriLa Hotel in Hong Kong. Ang Keng Lam and this general manager signed the document. Vice Mayor Zhang Baifa and I witnessed the signing: that's normal Chinese protocol. So we had an agreement to develop a large piece of land in concert with this Beijing real estate company. Within a few days, Ang Keng Lam went to Beijing to hammer out the last details.

Soon after he arrived in Beijing, I received a frantic phone call. The general manager wanted to make changes to points already agreed. And they were not unimportant changes; they were very major changes.

I asked Keng Lam over the phone: "Can you live with these changes?"

He said, "The truthful answer is no. What is worse, if we give way now, haven't we opened the floodgates?"

So I said, "Keng Lam, if I tell you to go to Vice Mayor Zhang Baifa, and tell him exactly what has happened and say we feel that the only way out is for us to treat the agreement as null and void and withdraw, would you agree?"

He replied, "I think that is the only way out."

And that is exactly what we did.

I had made many trips to Shanghai on business but, in 1992, I went on a purely social trip. I brought along two of my closest personal friends so that we could enjoy each other's company, play some golf and dine together. These were the late Ressel Fok and the Shanghai-born CM Woo. After we arrived, I received word that the Party Secretary of Shanghai at the time, Wu Bangguo, wanted to invite me to dinner in one of the city's state guest houses. Wu would be elected Chairman of the Standing Committee of the National People's Congress in 2003, and serve for 10 years before retiring in March 2013.

I accepted, but asked if I could bring my friends along. He graciously consented. I remember sensing on that trip that the ground was starting to move under Shanghai. My instincts told me that we were at the beginning of a new, major wave of development.

As soon as I returned to Hong Kong, I assembled a team led by Wong Siu Kong (Huang Xiaokang) and said, "We must now focus our energies on Shanghai."

During a trip to Shanghai shortly afterwards, Xiaokang said to me, "You know, Charoen Pokphand of Bangkok has established a joint-venture company with the Lujiazui Development Authority in Pudong, under which this joint venture company will decide who is allowed to develop which piece of land in the Lujiazui area. I think one piece is suitable for a hotel. Can we go to see it now?"

Within an hour we were in Pudong. We got out of the car and inspected an old shipyard that was no longer in operation. There were a few shipbuilding cranes, tons of rusting steel and coal yards on the site. Xiaokang said, "If you buy the site, they will close the shipyard and move it within a year or 18 months."

I asked if there would be any further development between the shipyard and the Huangpu River that could block the view. Xiaokang said there would be none. "This will be parkland and pedestrian walkways."

I relied on his judgment and information. Within one and a half days, we signed an agreement to purchase the land, and later built the Pudong Shangri-La Hotel on the riverfront site.

Our first hotel in Shanghai was actually in the Portman Center. Shangri-La was invited to manage the hotel by AIG, which controlled the Portman Center after Hong Kong & Shanghai Hotels dropped out of the project. (We later bought a 30 percent stake in the Center.) I went for the opening ceremony and was given a suite on one of the upper floors of the hotel.

I recall opening my window and looking out on the street, Nanjing Xi Lu. Diagonally across the road, I saw rows and rows of low, old, black-roofed buildings squatting on acres of prime land obviously in need of urban renewal. I immediately sent for Huang Xiaokang, and said, "Xiaokang, look across there. Could we acquire that?"

I must say we approached that land acquisition with gusto. We bought it quite quickly on terms of vacant possession, but paid top prices. Afterwards, we built the Shanghai Kerry Centre on Ci Hou Bei Li (Ci Hou North Lane), which became one of the nicest office blocks in Shanghai. We simultaneously built serviced apartments next door, which were quickly taken up. Thanks to the remarkable growth of Shanghai, it has been a profitable venture, despite the high cost of land. We later bought an adjacent three-hectare lot, where we built Kerry Centre Phase 2, consisting of Puxi Shangri-La, which has become a landmark in Shanghai.

The news of our success in China spread overseas. In late 1992 or early 1993, Coca-Cola contacted us and asked whether we might be interested in acquiring the bottling franchises for certain cities in China. I was very interested. So Coca-Cola sent different groups of officers from their Atlanta headquarters; in between we met the Coca-Cola China Limited people in Hong Kong. After a few months, I was invited to meet with the Asia-Pacific regional chief, an Australian by the name of Douglas Daft, who later became Chairman and CEO of the Coca-Cola Corporation. We met in Singapore in the presidential suite of Shangri-La Hotel. The meeting went well, and we soon drew up a pro-forma agreement.

I was then invited to Atlanta to meet the then-Chairman and CEO, the late Roberto Goizueta, and many of his officers. I flew into Atlanta for a meeting on 30 June 1993. I met with Goizueta in his office. We hit it off virtually at first sight. I was genuinely very fond of the man. He was a straight-talking man; I'm a straight-talking man. We had nothing to hide from each other.

John Hunter, an Executive Vice President of Coca-Cola, hosted me to a meal and asked me a question point-blank: what did I think of being invited to become a member of the Coca-Cola family?

I answered, "To be very candid with you, I think it's the first time in my life that something has fallen into my lap. All my life, I have had to work hard to build up something, but here I am asked to become a bottler of one of the world's leading brands. The business has already been built up. I am just becoming another cog in the wheel of Coca-Cola." I concluded, "It is a godsend opportunity, like a gift from heaven. I hope our relationship flourishes and prospers to mutual advantage." I felt that, in saying those words, I was merely stating a heartfelt truth.

The Coca-Cola people are a fine crowd, but they are very tough businessmen. Their act is, one, to tell their shareholders every year that worldwide total sales have increased so many percent. Two, annual profits from this worldwide increase in sales have risen so many percent. However, no profitable venture on earth can expect annual increases, inexorably. There must be years when there are setbacks. But in order to achieve those flattering results for shareholders, Coca-Cola acts like a bulldozer against the bottler, who has his back to a rock. Soon, we started to feel the pressure. It was up to us to survive and do our best.

The China market is fiercely competitive. There is Pepsi, of course, and many indigenous soft-drink bottlers, with the result that you cannot raise prices. In fact, prices of Coca-Cola products in China are among the cheapest in the world. On top of it, in China, there are multiple Coke bottlers: Coca-Cola first used Swire's and, in addition, invested in some of its own bottling plants in prime locations such as Shanghai. After we came in, China Cereals, Oils and Foodstuffs Corp, a state enterprise, also wanted to get into the act and applied a lot of pressure at the highest levels of government to obtain bottling rights.

For trade purposes, China is one seamless market, like the United States. Bottlers are given rights to cities or provinces, but what's to stop "parallel imports" across provincial borders? If Swire's Coca-Cola attacks Kerry Beverages, should we hit back at them? It was a very tough business.

Despite all this, we made good progress. I signed the initial agreement with Coca-Cola in Atlanta in July 1993. We opened our first plant in China in late 1994, and all 12 plants covered under our agreement by the end of 1998. By then, we had almost caught up with Swire's in total sales, despite their having a head start of a decade or more. Swire's also enjoyed a franchise in the Pearl River Delta, the richest single part of China.

I should mention that apart from the difficulties of doing the business - and every business has its difficulties, otherwise even a fool can be a rich businessman - our business relationship with Robertoo Goizueta was one of the best we have had with anyone. His friendship was genuine and warm when I saw him at his once every-two-or-three years' gatherings of his 30-40 favourite bottlers. He assembled us in Monte Carlo and virtually booked all of the best rooms in Hotel de Paris.

When I saw Roberto at the Monte Carlo get-together in August 1997, I sensed that his health was taking a turn for the worse. I remember telling my wife Pauline that I doubted that Roberto would survive more than six months. Sadly, he didn't.

You are very unlikely to lose your pants in Coke bottling in China, but squeezing out a satisfying profit is backbreaking work. We ultimately decided to leave this business, and sold out around the time of the Beijing Olympics in 2008. [pg 295-311]