Mr. Rick Yan, Vice President of Bain & Company, joins HAQ reporter Sophie Roell in a discussion of a wide range of topics, from China’s entry into the WTO to recruiting young Chinese into consulting.

Rick Yan is currently Vice President of Bain & Company in charge of Bain’s China practice. Mr. Yan specializes in corporate restructuring, mergers & acquisitions, customer loyalty management, and value improvement programs. He received a B.Sc. in engineering and his M.Phil. from the University of Hong Kong and his MBA with distinction from INSEAD in France.

HAQ: As far as China’s banking sector is concerned, people say that the Chinese banking system is in crisis and that China's state-owned banks have never really made financing available to the private sector. As an entrepreneur, how does one deal with this?

RY: Entrepreneurs are looking for seed money through angel investors, not through the banks. An entrepreneur will not approach the bank until he or she has raised the seed capital or, in some cases, not until the IPO stage. Therefore the banking system in China is not really relevant to the entrepreneur in the earlier stages. What matters it to raise the private capital to properly support a start-up. In the US there are more structured systems and processes in place for this. In both the US and China it is all about who you know and about working for the right organization.

HAQ: Regarding the later stages of financing, such as an IPO, is it a reasonable strategy to set up a company and then list on the Shanghai Stock Exchange in a few years? Or is a different strategy required in China?

RY: I was a speaker at the Fortune Global Forum in Shanghai in September 99. The government can say it is now supporting private enterprises by passing regulations but one of the strongest themes at the Forum was that unless you give private companies capital, they will not be a major contributor to China's growth. I am confident that it will get easier but I would not rely on a listing in Shanghai today just because it will be possible five years from now. So the best approach is to do it outside of China, like many of the portals. Does it matter whether you are listed in Shanghai or the US or on the Hong Kong GEM (Growth Enterprise Market) board? We will soon see some Chinese Internet companies listing on the GEM board and if the Shanghai Stock Exchange doesn't move fast enough, Hong Kong will take the lead, creating further competition.

HAQ: At an earlier panel, various Chinese Internet entrepreneurs seemed to be suggesting that funding is no problem at all, that the money is there for start-ups.

RY: It depends on the stage of project as well as what you want to do. If you're talking about seed money, it means you are still at the conceptual stage and have not created the product yet. You will need to rely on angel investors. To date, the most successful funding has been of portals like Sina.com, Netease.com and Sohu.com. As a result, portals are recognized as a large industry, making funding available. Capital can be raised for projects that are business-to-business or e-commerce related, like Ali Baba but it is not clear whether the market is ready for non-mainstream ideas. The first big IPO in the US was Yahoo, the next year it was followed by Amazon.com and the year after Monster.Com. It comes in waves: the first wave is the portals, then e-commerce and then the "niche areas". It is critical to think your idea through. If you want to do a portal in China today, it would be hard to persuade the decision makers that you're going to provide a better product than that of the competition. It is not impossible, but you need a very clear strategy and very strong backing: the seed money, financial support and an effective team.

HAQ: Concerning any of these stages or types of financing, is it correct that none of the money is coming from within China?

RY: This is a issue of concern for the Chinese government. Some of the major portals like Sina.com and Sohu.com are already foreign-controlled through venture capital funds from the US. The Chinese government is not in favour of having Yahoo as the dominant portal in China because it does have certain implications. Technically, Internet portals are a media industry, an area which the government is very sensitive about.

HAQ: Focusing on regulatory issues in China, in the case of Unicom –China 's second largest telecommunications operator—people complained that foreign investors came in and then only when they were actually going to make money, the government started saying: ‘well foreigners aren't actually allowed a stake in a Chinese telecom company.’ So it seems as though investors can put in money, but when they start making a profit, they run into regulatory risks. Should Internet entrepreneurs fear similar problems?

RY: In the Unicom example, it was never a secret that the Chinese government does not allow foreign investors in the telecom service industry. The foreign investors were aware that this was not allowed, but they took a calculated risk and that's why they set up these joint venture structures. Therefore it is not fair to now say that the government changed its mind. The foreign investors know it is illegal, but they are hoping that it will become legal. China Unicom needed money to upgrade to CDMA (Code Division Multiple Access), which is why they went to the US for a listing. The government subsequently discovered that when the foreign investment was converted, it equaled more than 50 percent of the company. So if you need to raise $1.5 billion, what do you do? I would call that a calculated risk, not a change in government policy. The same thinking applies to today's Internet entrepreneurs. You know that the government is going to want to manage the media to some extent. I think the market at this stage – China has not yet entered WTO and China has not published its regulations about the Internet – involves investors taking calculated risks. If the opportunity is large you may still bet.

HAQ: What are the other regulatory risks? And how can the regulatory risk actually work to the advantage of entrepreneurs?

RY: There is no doubt that the bureaucracy and regulatory issues are very time consuming. However, you can hire people to manage it. So, for example, in some of our ventures, we do have retired government officials who help us interact with other government officials. It is a small but necessary cost. I believe that this is the protocol of doing business in China, much in the spirit of businessmen in France who expect to have a three-hour lunch. You just need to adhere to the protocol. Also, as you point out, it does actually provide entrepreneurs with a window. If the government was not overly restrictive on the Internet, I think that Yahoo might already be the leading portal in China today, and Netease, Sohu and Sina might not survive. The government has erected a regulatory barrier that provides local Chinese entrepreneurs with time to establish their business. Without these regulatory barriers, these companies would be competing with Yahoo and AOL. As a result, it would have been very hard for any entrepreneurs to start. The market would consolidate quickly.

HAQ: Who are the most successful entrepreneurs in China? Are they typically local Chinese who have been educated in the West?

RY: I've been with Bain for 10 years, and in the past six years I've managed our recruiting. I've met many mainland Chinese students that have graduated from all the leading business schools. Since 1996 we have seen very strong graduates coming out of the business schools. This is a reflection of China’s process of opening to the world. I think those people are very smart, and Bain & Company hired many who have performed very well. When business school graduates start their own businesses, they will be very smart entrepreneurs because they have a broader, strategic perspective on business. They will have the presentation and managerial skills to work with bankers, to get the funding, and to manage the company. In the case of many Internet start-ups, they are run by MBA graduates returning to China.

HAQ: Will a foreign company always be at a disadvantage, always be at the bottom of the list for approvals? Or has that changed?

RY: I think that has changed. I think in the past few years the government has really changed its attitude towards some important industries. For example, look at the film industry and Kodak. Kodak has struck a deal with the government allowing them to consolidate the Chinese market. Why would the government allow that? I think the government realizes that the leading Chinese film producer – Lucky – will never be a global player. As a result they see the benefits of allowing Kodak to enter the market: hire Chinese people, buy Chinese raw material, export and sell in China through Chinese distributors. They create jobs in China, pay taxes in China, bring in technology and create profits in China. Another example is the automobile sector, where their strategy hinges on having their leading Chinese company work with a foreign partner. They then treat the foreign partner like a local.

HAQ: Will China's entry into the WTO make a difference anytime soon? Or will it be quite a few years before the positive benefits become apparent?

RY: I think it will change pretty fast. First of all, I gather that the government has either started drafting or has already issued regulations allowing foreign companies to into trading and distribution. There may still be some restrictions, and it may take some time to be completed, but the change is occurring. In addition, the excellent recent article in Business Week on the Dongfang Automotive Group shows that management is changing as well. They have appointed a new CEO. His job is to make the firm efficient, because if China’s high tariff on importing automobiles drops to 25% by 2006, there is tremendous pressure to restructure. If the company does not take action today, it will be wiped out. So they are laying off people, shedding unnecessary assets and transforming it. They now know there is a deadline for reform. It's just like a student’s academic experience at Harvard Business School. Unless you have a deadline, you will postpone work until the last day. Now China has a deadline, so it is beginning to happen and it will happen much faster than one would imagine.