Ken Wilcox, former CEO of Silicon Valley Bank, discusses his book “The China Business Conundrum” and the challenges of doing business in China. He explains the concept of “one bed, two dreams,” highlighting the disparity in goals between western and Chinese joint venture partners. Wilcox details his bank’s entry into China, emphasizing the strategic invitations and control exerted by the Chinese Communist Party. He recounts the extensive regulations and control mechanisms, including a three-year restriction on using Chinese currency. Despite the challenges, Wilcox values the experience, noting the complex interdependence between the U.S. and China.
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About this episode’s guest: Ken Wilcox
Ken Wilcox was the CEO of Silicon Valley Bank (SVB) from 2001 to 2011, then the CEO of SVB’s joint venture with Shanghai Pudong Development Bank (SPDB-SVB) in Shanghai until 2015, followed by four years as its Vice Chairman. He currently serves on the boards of the Asia
Society of Northern California, the Asian Art Museum, and UC San Diego’s 21st Century China Center, as well as Columbia Lake Partners, a European venture-debt fund. He is on the Board of Advisors of the Fudan University School of Management in Shanghai and an Adjunct Professor at U.C. Berkeley.
Ken holds a PhD in German from Ohio State University and an MBA from Harvard Business School. He has given numerous speeches in both English and Chinese, published a variety of articles in the banking press, and recently wrote the management book Leading Through Culture: How Real Leaders Create Cultures That Motivate People to Achieve Great Things (Waterside Productions, 2020) and its accompanying workbook, How About You? (Waterside Productions, 2023). His account of establishing an innovation bank in China, The China Business Conundrum: Ensure that Win-Win Doesn’t Mean Western Companies Lose Twice, is forthcoming from Wiley.
To connect with Ken, please visit: www.linkedin.com/in/kenwilcoxsvb/
Timestamps for EP259
- Introduction and Overview of the Podcast (0:00)
- Ken Wilcox’s Journey into China (4:40)
- Challenges and Strategic Invitations in China (8:10)
- Guanxi and Corruption in Business Relationships (14:13)
- State Control and Joint Venture Challenges (20:42)
- Impact of SVB’s Collapse and Final Reflections (40:02)
Takeaways
- Joint ventures in China often suffer from differing goals between Western companies and their Chinese partners, a phenomenon Ken Wilcox refers to as “One Bed, Two Dreams.”
- The Chinese Communist Party (CCP) holds significant control over both private and state-owned companies, making it difficult for foreign businesses to operate independently.
- Guanxi, a system of mutual obligation and trust, plays a critical role in business relationships in China, but it often involves navigating corruption and complex social expectations.
- Foreign companies entering China are often targeted for their intellectual property, and the CCP uses strategic partnerships to gain technological insights.
- Ken Wilcox’s experience with Silicon Valley Bank in China illustrates the frustrations foreign firms face due to slow regulatory processes and overwhelming state control.
Links relevant to the conversation
Ken’s book “The China Business Conundrum”:
https://www.amazon.com.au/China-Business-Conundrum-Win-Win-Companies/dp/1394294166
Previous Economics Explored episodes on China:
China’s Economic Future Under Xi & the Australia-China Relationship w/ Emmanuel Daniel – EP253
Enterprise China: what western businesses need to know w/ Prof. Allen Morrison – EP171
Why we’re in the Decisive Decade with China & what the West should do w/ Dr Jonathan D. T. Ward – EP182
China, Taiwan & the Indo-Pacific w/ Dr Greta Nabbs-Keller – EP146
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Transcript: The China Business Conundrum: One Bed, Two Dreams w/ Ken Wilcox, former CEO, SVB – EP259
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Ken Wilcox 00:03
I know American business people who have done a lot of business in China over time, and they still cling to this notion that China has state owned companies and it has private companies. Well, it does, in a sense, but their distinction is not the same as the distinction in the US, meaning the Chinese Communist Party controls anything it wants to.
Gene Tunny 00:34
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. In this episode of economics explored, I’m excited to have a conversation with Ken Wilcox, the author of the China Business conundrum. Ken has an impressive background as a former CEO of Silicon Valley Bank, where he played a significant role in expanding the bank’s reach into China. Ken, in the conversation, also gives us his perspective on what happened with SVB last year. Ken refers to the Chinese expression, one bed, two dreams to illustrate the challenges of joint ventures in China, he explains that businesses often enter partnerships with different goals, especially in China, where government interests can add complexity and challenges. Join us as we explore the intricacies of doing business in China with our amazing guest, Ken Wilcox. A special thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants, economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it. Ken Wilcox, welcome to the program.
Ken Wilcox 02:16
Thank you very much. I’m happy to be here.
Gene Tunny 02:19
It’s excellent to connect. Ken, you’ve got a new book out the China Business conundrum. Ensure that Win Win doesn’t mean Western companies lose twice. So I’m going to be very interested in your perspectives on what that that conundrum is. So just simply, is the conundrum that I mean, China’s a huge market, but there are risks going into it, and any business going into it has to be aware of those risks.
Ken Wilcox 02:45
That’s exactly right. Actually. That’s the title that was assigned to the book by Wiley, our publisher. My original title, my working title, was a little different, and I thought it was a pretty good one as well. It was based on a phrase that’s used in China by almost everybody at some point in time or another. The phrase is one bed two dreams, which, in my opinion, adequately describes why most joint ventures don’t work actually anywhere, not just in China.
Gene Tunny 03:20
Okay, can you explain that one bed two dreams?
Ken Wilcox 03:24
One bed two dreams? Yeah, another way of looking at it is it probably explains the high divorce rate in the US as well, meaning people get together and but they each have a different vision of what they want to happen, how they want the relationship to evolve, what their goals are. And that’s, I think, really true with joint ventures, and especially so in China, exactly,
Gene Tunny 03:53
yeah, that makes perfect sense now that that’s, yeah, that’s, that’s interesting. Okay, and can you tell us how, how did you get involved in in China? Can you tell us a bit about your journey from because you’re in you’re in business, you’re in the financial sector at Silicon Valley Bank. Can you tell us how you ended up getting into the Chinese market? Please?
Ken Wilcox 04:13
Sure. Absolutely. So. I was with Silicon Valley Bank, fundamentally, for 30 years. You’re probably aware of the fact that our bank doesn’t exist anymore, as of about a year and a half ago, because of a huge mistake that was made by the CFO and not corrected by the board, at least not in time. Be that as it may, our business model was a really good one. Take some pride in that, because I was, in a sense, the author of the business model when I became CEO in 2001 at that point in time, our bank worked with technology companies, maybe 30% of our portfolio. We worked with real estate developers and we worked with small business. Business. And the big decision that I made in 2001 was this. I felt that, you know, there at that point in time, there must have been 13, 14,000 banks in the US, and all of them worked with real estate developers, and all of them work with small business, but we were almost the only one in the entire country that worked with technology companies, and in particular with early stage technology companies. So that was where we had a leg up on everybody else. And my feeling was, why compete against 13,000 other banks when you don’t have any specific advantage over them. Why not focus on what we do better than anybody else? So my first big decision I only made a couple in 10 years as CEO, was to ask two thirds of the portfolio to find another bank over time, and then we filled up that empty two thirds with technology companies. And then the second thing I wanted to do was go global. Because we were we had pretty well penetrated the US. At that point in time, we had, by far and away, the biggest market share going global for us, included, initially Israel, India, London in particular, but Europe in general, and finally, we set our sights on China. I was in China with a group of people from our bank in the year 2000 giving a speech at the first meeting of the Chinese Venture Capital Association. We spent a couple of weeks after the speech touring around, and it was pretty clear to us that there were budding innovation centers in China, that if the trajectory continued, would be huge. So we decided we really wanted to be there, and then ultimately, it takes a long time to get started in China. Ultimately, we were able to position ourselves in such a way that China was asking us to come and build a technology oriented bank, just like the one that we have here in the US, in either Shanghai or Beijing, and that was the invitation, more or less coincided with my stop date, meaning already in 2001 when I became CEO, I knew that I was going to retire at the end of 2010 would it be 10 years in that position, that’s sufficient. I was already of retirement age. We got the signal from Beijing to come to China, and when the board made the decision to accept the invitation, and looked around, unfortunately or fortunately for me, they couldn’t find anybody who wanted to go, except for me, so I talked to my wife, and she was as excited as could be. She said, that’s an adventure you can’t miss. So let’s go.
Gene Tunny 08:12
Gotcha Okay, and I’d like to explore what you found in China, because from your book, I get the sense that you’ve got to be wary of these invitations. It seems that they’ve they’re strategically trying to find business partners that they can get the IP of, they can, you know, get some technology or knowledge transfer from. And so you were, it sounds like you’re actively targeted. Is that, am I reading that correctly?
Ken Wilcox 08:41
Yeah, that’s exactly right. Exactly right. That’s one of the main points. In fact in my book, somewhere around the beginning of 2009 fully two years before I moved to China, I was encouraged to get together in a meeting with the person who was then party secretary of Shanghai. His name was Yu Jung Chang. When Xi Jinping came to power at the end of 2012 Yu Jung Chang was elevated from party secretary of Shanghai to a member to being a member of the Standing Committee, meaning one of the seven most powerful people in China. I had, I believe, four meetings with you, Jung Cheng in 2009 and during those meetings, he laid it on heavy. This is, honestly what he said. You may think I’m exaggerating, but he said, you know, Ken, you’re you’re one of the smartest people I’ve ever met. You really understand China better than almost any Westerner I’ve ever run into. We’ve scoured the universe and we’ve found your bank. It’s the one that we where we most. Higher then he explicitly said, more than Goldman Sachs, more than Morgan Stanley. We have to have you here. We’ll pave the way. And of course, I didn’t realize that this is all part of the process, meaning there were probably similar such meetings going on in other places in China, maybe even that same day, because flattering you beyond belief is the first step in the process. And of course, I’ll admit that I was more naive than would have been desirable. On the other hand, I wasn’t so stupid that I didn’t realize he was laying it on too thick, but same time, you know, it felt good. And I really wanted to build a bank in China, so we accepted the offer.
Gene Tunny 10:50
Okay? And then how did it go? So what was their your ongoing relationship with the officials, and how did they facilitate or hinder the setting up of the bank. How did the actual relationship progress, and what did they get out of it? You know, What benefits did you get from the relationship? And, yeah, I just want to understand how it evolved, and how you came to this view that you express in the book about the just the this China Business conundrum, please. Ken
Ken Wilcox 11:22
Sure. First of all, it was a very long process. Again, those conversations, as I said before, at the beginning of 2009 by 2010 we were in active conversations with the bank that would ultimately be our joint venture partner, kind of a shotgun bride, if you will. They were selected for us by the Chinese Communist Party. And the way it was described to me at the time was, of course, you realize, Ken, you’ll need to have a joint venture partner, but understand this is for your benefit, not for ours, because China is a risky place, and it’s so much different from what you’re used to, you’ll need a joint venture partner. And of course, that made perfect sense to me, and frankly, the conversations over about a year and a half period with our wood joint venture partner, went swimmingly. It was all very, very nice. And once I arrived in China, though, at the beginning of 2011 there were a lot of mixed signals, and there was a lot of hurry up and slow down. Hurry up and slow down. It became really quite confusing for me. In retrospect, I believe that I would have benefited by spending a couple of years, of course, I’d been in China at that point in time, probably at least 20 times by the time I moved but visiting and living are two different things, and it probably would have been better if I had spent a couple of years in China before we even embarked on this process understanding China from a political point of view, from a governance point of view, from a from A cultural point of view and from a business climate point of view. And I might not have been so naive, right?
Gene Tunny 13:27
Yes, you mentioned there’s this concept. I’m not going to pronounce it properly, is it Guanxi? How do you pronounce that? And could you explain what that is, please?
Ken Wilcox 13:37
Yeah, guanxi is probably maybe with the most commonly used word in the literature about how people do business in China, and all it really means, I think, is mutually beneficial relationship. In fact, I’ve gotten more than one lecture by members of the party on what guanxi is the benefits of Guanxi. The concept is, let’s say that gene that I want to develop a relationship with you, and you’re interested in developing a relationship with me. Every time I see you, I’ll bring you a small gift, and I’ll be constantly looking for opportunities to do you favors, and you’ll be doing the same thing for me in my direction. And over time, we build a relationship that is allegedly at least based on trust, it’s certainly based on mutual obligation, because I’ve given you so many things you owe me, and you’ve given me so many things I owe you, and in a sense, it’s be it’s even more important in today’s China. It’s an ancient concept, I believe. But it’s even more important in today’s China because the level of trust in today’s China between individuals is really very low. World as a result, I would say, of the way in which the Chinese Communist Party has governed since it came to power in 1949
Gene Tunny 15:12
Okay, so this guanxi, this is interesting, and you’re bringing these gifts. Are you bringing gifts to, at times, party officials or officials of state owned enterprises. I just want to understand how this, what’s the role of the state in in this, and does that mean that there’s some is it corruption in a way? Can you elaborate on that? Please? Just want to understand this whole system and whether there is any corruption involved in it.
Ken Wilcox 15:39
Sure. No, there’s, frankly, a huge amount of corruption involved in by the way, Gene I don’t mean to imply that there’s no corruption in the US or in Australia, but corruption takes many forms, and it’s often informed by culture. So it’s as I’m going to describe it, I would say it’s shared by many other countries, but somewhat unique in China and yes, I was dealing constantly with government officials. Because one thing that we don’t appreciate, we Westerners and Americans, maybe in particular, we may be more naive than most Westerners. We don’t appreciate is the extent to which other countries have different cultures. I think we operate under the assumption that people are pretty much the same all around the world, and of course, there’s an element of truth to that, but it’s also true that there are significant differences in culture, governance and the structure, the financial systems that can make a huge, huge difference in the way you conduct business. So certainly, one aspect of the party’s behavior is to shower favors and gifts on people like me. Frankly, I and I think that it’s it’s somewhat manipulative in the sense that it puts us in a position where we first of all feel obligated, and secondly, if we’re not careful what kind of gift we accept, we may actually end up feeling compromised, which may be one of the reasons why business people who end up being played and I would argue that almost all Western business people are played in China, largely by the government, meaning the Chinese Communist Party. One of the reasons that they don’t like to talk about it afterwards is many of them have been compromised to one degree or another. Yeah, I believe.
Gene Tunny 17:53
Yes, yeah. Oh, plausible for sure. And what sort of gifts are we talking about? Are we talking about bottles of wine? Are we talking holidays? Are we talking Rolex watches? What type of gifts are we talking about?
Ken Wilcox 18:06
All kinds of things, yeah, but I’ll give you three examples, and these are representative examples. One of them would be my conversation partner at our joint venture partner, the man who was the president of the bank at the time, I think about five or six months into our stay, after we arrived, he almost sheepishly asked me one day, he said, Ken, is it common in the United States for people to invite their business partners to dinner at their house. And I said, Yeah, that happens on occasion, for sure, it’s I actually somewhat rare in China, you don’t get invited into houses. Often you get invited to restaurants, but sell them into houses. So he said, Well, would you mind inviting me and my wife to dinner at your house? And I said, No, that’d be great. So we set it up. And my wife was shocked. She said, I don’t know how to cook Chinese food. We’ll have to get a caterer. In any case, he brought a gift with him. In fact, I I have it here somewhere. It’s a mythological creature made out of glass. It’s about 10 inches long. It’s kind of part lion, part dragon. In any case, I thought I’d seen that in a shop sometime in the month or two prior, and I thought this is a pretty expensive gift, so I checked it out the next morning, and it was, it was worth about $800 retail Well, our board, meaning Silicon Valley Banks board the interpretation of the Foreign Corrupt Practices Act precluded me from accepting this gift, right? So in a pickle there, that’s one example. Another example would be in Shanghai. There was a a. Woman who worked in the financial services department of the municipal government of Shanghai, who was in charge of what they call the Little Giants, and these are the government spends a lot of time studying the market, trying to figure out which startups are likely to be successful, and then nurturing them in one way or another in order to enhance the probability that they’ll be successful. And she wanted to develop a relationship with me, so she and her husband invited my wife and me on a trip to go to Shandong Province to Confucius’s grave, which is that’s an attraction. People like to go there. So we went. As soon as we got there, we were delivered by this couple into the hands of high level party officials. And I really we ended up not even seeing the couple for three days. And for three days, high level party officials were were taking care of us, and they wanted to pay for everything. They wanted to pay for the hotel and every dinner. And these were expensive hotels, I refused, and it was interpreted as somewhat of an insult. And the third thing that I’ll mention was in my second and third year there, I believe this is my strong recollection two times. Anyway, the head of HR in our joint venture, who was a member of the party, came to me with the good news that the party had decided to give me a bonus was about close to a half a million dollars, and it was meant for me. It wasn’t for anybody else. It was meant for me, and it was just for being such a good citizen. So what I did with it? I didn’t I didn’t want to forfeit the opportunity to add a half a million dollars to our equity base in the bank. So I took it and funneled it into the bank, which was contrary to their wishes. They wanted me to keep it for myself. But I also wonder how many people actually do that. My suspicion is that a number of people stick it in their own bank account. And I’m not saying that it’s always the case that they feel compromised to the extent that they don’t want to talk later about the way in which they’ve been played, but I will guarantee you they’ve been played, and that most people would not want to, would not want to complain about it in public, because they would be afraid of potential repercussions.
Gene Tunny 22:50
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Gene Tunny 23:24
now back to the show. So yeah, a few things to explore out of that. Can we just go back to the joint venture partner that you had? Was this a? Was this a private sector, a bank? Is it? Was it another bank? Was it a was it state owned? Was Was there involvement of the Chinese Communist Party? Somehow? Can you just tell us a bit more about the that the partner?
Ken Wilcox 23:51
Yeah, I will. And let me also at the risk of something like I’m picking on your language, which I don’t intend to do, but I want to mention something else before I answer your question, and that is one of the reasons that we we have such difficulty, we Westerners, and maybe in particular, we Americans, is that we tend to we have mental models. We’ve got ideas in our head about the way things work based on our own experience of the US, we take those with us to China, and then we just superimpose them on China, and we begin to interpret what we see through the lens of these mental models. So that’s what you happen to accidentally mention one of my favorite between state owned and private I know American business people who have done a lot of business in China over time, and they still cling to this notion that China has state owned companies and it has private companies. Well, it does, in a sense, but their distinction is not the. Same as the distinction in the US, meaning the Chinese Communist Party controls anything it wants to. And you can be a so called private company, but they may very well. It’s highly likely if you’re the least bit successful own part of you, sometimes clandestinely through shell companies, they definitely will have a party committee which can supersede your own personal wishes or the decisions of the board. So you may be a private company, but you from by our US definitions, you’re sort of gravitating into being state owned. Now back to your question. Virtually all banks are primarily state owned in China. So yes, our joint venture partner was state owned, actually owned by the municipality of Shanghai. And because we’re I negotiated 5050, which is rare. It’s usually when you enter into a joint venture with a particularly, a clearly, unequivocally state owned Chinese company. The most you get is about 20% and I was so proud of myself because we negotiated 50% I didn’t realize at the time that it’s irrelevant, because in the end, the CCP will control you whether you own 10% or 50% or 80% so yes, our joint venture partner was a state owned company, and by virtue of the of that fact, our joint venture was functionally a state owned company,
Gene Tunny 26:51
gotcha, and what’s the status of it now? Is it? Is it ongoing? And what was it impacted by the collapse of SVB?
Ken Wilcox 27:00
Yes, it was impacted by the collapse of SVB. So I’ll tell you this, when we got permission to enter into this joint venture, we were literally the first western bank, I believe, to be given permission to enter into a joint venture with a Chinese commercial bank. I need to stick the word commercial in there, because it wouldn’t be true of investment banks. Morgan Stanley, years before, had been given permission to do a similar such thing, but we were the first western commercial bank given permission by the party to enter into a joint venture with a Chinese commercial bank. Our status meaning that permission and the banking license that went with that was as good as gold when we got it. A lot of people would have liked to have had it, and I’m sure we could have sold it for a pretty penny. Having said that, by the time SVB disappeared, which was a year and a half ago, on the one hand, our joint venture bank in China was, if not flourishing, certainly doing well enough to be desirable. On the other hand, relations between the US government and the Chinese government were at such a low ebb and continue to be, that nobody would have liked to have had it so when SVB was taken over by the regulators in the US in March of 2022 the regulators disassembled the bank in all of its parts and put them all on the auction block. And the US commercial banking operation was snatched up almost immediately by a bank from North Carolina Culver citizens and then other parts of the bank were bid on in the fullness of time. To the best of my knowledge, there is only one part that was never bid on by anybody, and that was our 50% ownership in the joint venture in China. And as a result, I think that the Chinese government, understandably, I can’t fault them for this, gave up on its being purchased by anybody and simply absorbed it about five or six weeks ago into our joint venture partner. So it just disappeared. Rod,
Gene Tunny 29:40
so the bank continues, right, okay, but the the SVB stake is gone, okay. Can I ask what you meant? You talked about control by the officials or the the Chinese? What? What did control involve? What are some, some examples of that?
Ken Wilcox 30:00
That I’ll speak about control in three different ways to give you a better sense, the first thing I want to say, which is arguably the most important, is that when we they granted us the license, meaning we talked about it for two years when I moved to China, we began putting the parts together. That was at the beginning of 2011 we finally, actually got the banking license at the end of 2011 so it took almost a year to put it once I was on the ground, it took almost a year to put it together, and putting it together mean, meant creating a bank from scratch and hiring people to fill all the positions. So by October of 2011 we had 62 positions filled. I believe there were only two or three Americans, I being one of them, the rest were all Chinese nationals. We finally got that, that license, the banking license. But when we got the banking license, they told us, the government told us, we’re so happy. This is a wonderful day when you get your banking license today. It’s a big success for both of us. However, there’s one thing that you probably aren’t going to like, but not don’t worry about it, and that is, there’s been a law on the books now since the end of the Mao era. You know, Mao was from 1949 until 1976 he basically dismantled the banking system. There were no banks in China for all that period. Then Deng Xiaoping came to power, late 70s, early 80s, and he ordered the RE establishment of the banking system. So what they told us in October of 2011 is, you know, we’re sorry that this is the way it is, but there’s a law in China that’s been around since Deng, and the law says that if there’s any new bank, and that your joint venture Bank is a new bank that has any foreign ownership, and your joint venture bank has foreign ownership because 50% of it is owned by SVB, and only 50% of it by the Chinese government. That new bank cannot use Chinese currency for the first three years. So that is definitely a form of control to the extent that we really didn’t have any business to do for three years, it would be gene like somebody saying to you, we’re so happy we’re giving you a license to open a restaurant, but sadly, and we’re sorry, this is the case. We wish we could undo it, but sadly, you’re not going to be allowed to be allowed to use food for the first three years, because without Chinese currency, there wasn’t much we could do. And so that was that is a major form of control, correct. The second thing that I will mention is that the situation in China is different from the situation in the US when it comes to banking licenses. If you get a the Federal Reserve or the Controller of the Currency granted you a banking license, you could do anything any other bank could do, starting on day one. And what I found out in November, in October of 2011 is yes, we got this banking license, but all it permits us to do is to call ourselves a bank, have a front door and welcome people to come in. It doesn’t allow us to do any banking business, per se, meaning, even if we had been allowed to use renminbi, Chinese currency, we couldn’t have opened deposit accounts, we couldn’t have made loans, we couldn’t have exchanged currencies, we couldn’t have done anything, because every single discrete banking activity requires A separate and discrete license. So to run a bank like ours, which is be true of almost any other bank for that matter, would require 2030 licenses. We by the time we disappeared, we still didn’t have all 2030 licenses. So that’s another form of control, correct? Yes, yes. The third thing I would say is the Federal Reserve came into existence a little over 100 years ago, I think 115 years ago, and in the last 150 years, let’s just say it developed a. Let’s just say, arbitrarily, this is a made up number, but 1000 regulations for banks. If the Federal Reserve has 1000 regulations for banks, the CBRC, which was then the regulator in China of banks, has 50,000 regulations, and they’ve only been in existence since 2000 and either one or two I forgot which so in, you know, in a little over a decade, they developed vastly more regulations than our Federal Reserve was able to develop in over 100 years. And interestingly, we had to report to the Federal Reserve about monthly. We had to report to the CBRC, our joint venture bank in China had to report to the CBRC daily. It was like running a McDonald’s where every night, you plug in the information of the day and it goes immediately to Chicago, where it’s interpreted, and then directions are shot back to you the next morning. And that happens daily in McDonald’s, and that happens daily with banks in China. So that’s a third level of control, which it’s utterly mind boggling, isn’t it? Yeah,
Gene Tunny 36:21
it sounds mind boggling. It’s quite, quite extraordinary. Just want to understand what did they end up getting out of it? Or like this, I get the sense that you think that the SVB got it, didn’t get the as good a deal as it as it could have, or that there was, you know, the the Chinese took advantage of SVB in a way, what did they end up getting out of it that you think was unfair in a way.
Ken Wilcox 36:54
Let me steer clear of words like unfair. Okay, although I feel that way down deep, don’t want to use that word. I this was. This hearkens back to what I said at the beginning about my original title, one bed, two dreams. Yes, our dream, I can tell you what our dream was, very brief. We wanted to be, and were until we disappeared a year and a half ago, we wanted to be the most important player in the financial services arena, with respect to technology companies, and in particular, early stage venture backed technology companies. And we fundamentally achieved that we had about 60% market share in the US, and we had growing market share in innovation centers around the world. And we felt that innovation is a global industry. Unlike many other industries, you can have a mining industry that’s fundamentally local. You can have a farming industry that’s fun, agricultural that’s fundamentally local. But technology is global, inherently global. If you’re cutting edge, you have to be cutting edge everywhere, because technology is an abstraction, and as you well know, it travels around the world. No president can build a wall high enough to stop it. So that’s the role we wanted to play. And the other thing, of course, was we were hoping to make money for our shareholders. So that was our dream. What was their dream? Their dream was to understand our business model and how it worked, and that was first and foremost their dream. They didn’t, I don’t think they cared one wit how much money they made off us. I think they simply wanted to understand our business model. I think we were a great disappointment to them, because with by the end of the first year, I was able to discern that they had been operating under the mistaken perception that we had an algorithm that would enable us to differentiate between early stage technology companies that would ultimately be successful and those who wouldn’t. And when I, when they accused me at the end of the first year of bad faith because I hadn’t disclosed the algorithm when I explained to them, you know, I’m I’m shocked that you would think that we don’t have an algorithm. Ours is good old fashioned hard work and pattern recognition. To be a lender in our bank, it takes about 10 years. You have to go through an extensive apprenticeship, and that’s the way it works. There’s no algorithm. They were shocked in the same way that I was shocked. I. Uh, so that we were a disappointment to them, I think, and I think that that caused them to become increasingly less interested in our success as time went by. But that’s the the difference I would do want to explain one more point in time, because it’s so pertinent to the experience, and that is that when I found out in October of 2011 that we weren’t going to be able to do much business in the next three years anyway, because we wouldn’t be able to use, um, Chinese currency, I assigned what, what few banking activities we were able to engage in to other people, and I spent three years trying to find a path to Xi Jinping, because ultimately, in a society as authoritarian as the PRC, big decisions emanate from the top all the way down. And if anybody was going to give us an exception to allow us to begin using renminbi, it would have to come from the likes of Xi Jinping. So I sat down with myself and charted several paths from my humble station up to the top and worked those paths for three years, and I made some progress. There’s evidence that I made progress and that my plight and my story was known by people at the very top of China by the end of the three year period. However, I did not succeed in getting the exception. But here’s what did happen after three years, the government, slash party, came to me again and they said, this is such a happy day. Everything’s a happy day. That’s such a happy day because this is the day we can grant you permission to use renminbi, so it’s what we’ve all been working toward. And then they said, By the way, there’s one other request. We admire your business model so much that we want we’re starting next week, a brand new bank here in Shanghai, and we’re going to use your business model. And would you mind spending some time with the management team of this new bank, helping them to understand some of the things that they were not able to understand? Why? Watching you fundamentally doing nothing in the last three years? Yeah, so that’s how it played out.
Gene Tunny 42:45
Yeah, yeah. Go ahead.
Ken Wilcox 42:47
Let me just say one other thing, and that is when we got the license in October of 2011 they said to me, um, it it’s sad that we can’t let you use renminbi, but you can do what we would do, meaning here in China, we all help each other because we’re trying to succeed as a country. And you can teach your business model to Chinese banks in the next three years. That would be a good use of your time. And we will. We know that you’ve got a heavy burden with these 62 employees. We don’t want you to lose too much money, so we’ll give you subsidy for the next three years, not enough to be profitable, but enough to lose as much as you might otherwise. And they were constantly in the further the three year period, asking me to send groups to different banks in China to teach them how to how our business model works, so that they could begin to emulate it as quickly as is possible. And frankly, I wasn’t willing to do that. That would be what I call, in my book, The Green Hat award. And what I mean by that is there’s a belief, a common belief, in China, that you men shouldn’t wear green hats, because if you wear a green hat, it indicates to others that you’re being your wife is cheating on you, and I felt they should be wearing a green hat, because I I gotten our board support in building this new bank in China, and it was really so that I could teach my competitors the our business model, with which I hope you see the connection, if you don’t just uh, ignore
Gene Tunny 44:47
it, yeah, yeah. I mean, it’s, uh yeah, it’s extraordinary. So they’re wanting to, wanting you to teach competitors of of the bank, it’s just bizarre.
Ken Wilcox 44:58
Honestly. Faci. Board and say I was I taught a whole bunch of competitors how to use our business model. And so I want to underscore one thing you haven’t asked, but I’ll answer anyway. And the one thing I want to underscore was it didn’t work, but I really valued the four years in China was exhilarating. It was fascinating. With the most interesting four years of my life, my wife would say the same thing, that’s on the one hand, on the other hand, I do believe that the Chinese Communist Party is beyond a shadow of a doubt the most problematic business partner, joint venture partner that you could imagine? Yeah. Oh, it was a very mixed experience.
Gene Tunny 45:52
Yeah, I can I can understand. I’ve had a guest from Arizona State University on the show before, Alan professor, Alan Morrison there, and he’s written a book enterprise China. And he, you know, we talked a bit about the specifics of it and the involvement of the party and in businesses across China. And, yeah, similar, similar theme to to your book, I know you call it something different, don’t you call it, is it China rink you call the model,
Ken Wilcox 46:21
is the phrase that I use because think about it this way, and I’m sure it sounds exactly like what your other acquaintance in Arizona is pointing to. Think about it this way. If Cisco goes to China, it’s hardly likely that any other American technology company is going to assist Cisco in its attempt to compete in China, and the US government is unlikely to assist Cisco in its attempt to compete in China. I just picked Cisco arbitrarily, but Chinese banks sometimes help each other, and the Chinese government definitely steps into this fray, and through its many levers, helps Chinese companies succeed when we were, when I was at the absolute low point, thinking, this is never going to work, I had been, by the way, by way of background, I’d been on the board of the San Francisco fed for seven years, starting somewhere around 2005 I was on that board. And even after I went to China, I went back once a month for a day to attend those Federal Reserve Board meetings. So when I was at a low point in China, sort of midway through the four year period, I went during one of my monthly visits to the Fed, I took the opportunity to talk to the people in charge, and I said, Well, I don’t understand why. In 2011 I believe it was you granted three Chinese banks licenses to operate in the US, and they’re allowed to use American currency. Why on earth aren’t we? Aren’t we reciprocating another word for tap? And you know what their response was? Yeah, that’s not our job. You chose to go on your own. We didn’t send you, and our job is to ensure the safety and soundness of the American banking system. It’s not to succeed in China, or it’s not to discriminate against Chinese banks in order to balance the equation. And that say that in a means burdened way, it’s just there, yeah. So it is different, yeah, yeah,
Gene Tunny 49:04
absolutely. Ken has been a great conversation. I’ve learned a lot. And, yeah, it was good to explore your experience. I mean, I could probably talk to you for another hour, but I’m gonna have to, I’ll have to wrap it up, because you’ve got, you’ve got things to do, and for sure. And, yeah, it’s been, it’s been amazing. I think there’s that bigger conversation about policy toward China, and there’s that whole notion of decoupling and all that. And now there’s me, there’s very, you know, there’s the debate about trade policy towards China, but that’s, you know, that’s another, an issue for another another day, I suppose. Is there anything else you’d like to mention before we wrap up? Please? Ken, no, I
Ken Wilcox 49:48
think I’ve pretty much said it all. I very much appreciate the opportunity. We are in somewhat of a pickle here in the US. And for that matter, in Australia, because we are not withstanding the disengagement that we believe we’re executing right now. We are inextricably tied up with China and undoing those those ties is is not an easy thing. It’s an extremely complicated thing.
Gene Tunny 50:28
Exactly. I think that’s a great point to end on. Very good. Ken Wilcox, author of The China Business conundrum. I’ll put a link in the show notes to your book. I recommend people read it, because it’s great. Yeah, I love that brain hat story, or that mention of that and the guanxi learning about that as well. That was that’s been very useful, very good. Ken. Thanks so much for your time. Hope the book sales go well and yeah, hopefully we’ll connect sometime in the future.
Ken Wilcox 50:57
Thank you so much. I really appreciate the opportunity. Good luck to you,
Gene Tunny 51:02
right? Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explored.com or a voicemail via speak pipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week. You music.
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Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.