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ENTERING GLOBAL MARKETS

Doing Business in China
 

Michael Lee is on the verge of becoming the first American entrepreneur to build big in the world’s most populous country.
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Michael Lee is eerily quiet as his world comes down noisily around him.

Packed into a cramped conference room in his company's modest offices in Nanjing, China, Lee's key managers are at one another's throats. The more angrily they spit blame at one another for the disastrous, unsalvageable situation the company finds itself in, the more enervated Lee seems to become, until finally he is no more than a slumped statue following the action only with slight movements of his eyes.

The company has been piloting two stupendous commercial real estate development projects, one in New York City and the other here in Nanjing, a city of eight million west of Shanghai. Lee, who was born and raised in Taiwan and is a U.S. citizen, is spending a week in Shanghai and Nanjing to frantically work contacts, make new ones, push his contractors, and do whatever it takes to keep the 4-million-square-foot Nanjing project moving ahead. His managers are now explosively listing the ways in which this mission has failed. The time frame is too short. The plans are all wrong. They've got the wrong consultants and architects. They lack a coherent vision. Their management structure is dysfunctional. There's more—a lot more. But the real killer, the one truly insurmountable obstacle, is that they don't know where the money will come from. And if the project dies, as it now appears it will, the company stands to lose the tens of millions of dollars of its own funds it has sunk into the project and tens of millions more of funding from investors large and small.

The recriminations go on for more than an hour, during which time Lee mostly doesn't say a word or even change his grim expression. And then, suddenly, Lee seems unable to contain his emotions. They show first in his eyes, then his mouth. The members of the group notice the shift, and, caught by surprise, they become quiet and simply gawk at him.

Lee is not a polished executive; there is nothing slick about him. He is short and a little dumpy, with a pleasantly bland face. He speaks in an odd way that makes him hard to understand in two languages. He does not have an M.B.A. On the other hand, Lee has certain qualities that can't be taught in business school or faked with a smooth smile and line of chatter. He is an intuitively shrewd student of what makes people and deals tick; he is gutsy and ambitious, a relentlessly opportunistic entrepreneur who refuses to recognize when something can't be done. Above all, he is a classic networker who knows how to forge ties and make them work for him and the other guy—even in China, where the vast majority of Western business people find themselves shut out of the best deals and baffled as to how to break in. Lee has parlayed these skills into a small empire that, should the New York City and Nanjing projects survive, would be a large empire. And he would be one of very few Americans to pull off such a massive coup in either China or contemporary New York. Lee could end up being the biggest small-business owner in the world.

Lee has fought hard to keep both projects afloat. And in spite of an endless stream of near-showstoppers, he has repeatedly surprised his doubters and even his own managers. But the meltdown today here in the Nanjing meeting makes clear that Lee is finally out of surprises. Though that would make it hard to explain why, as his angry, exhausted, defeated team members look on in open-mouthed disbelief, Michael Lee has broken out in a grin.

Four Days Earlier: Saturday, Shanghai
The train from Shanghai's airport to the heart of the city hits 265 miles per hour, according to the digital speedometer on the train's wall. It's one of a network of ultrahigh-speed trains China is building to connect all of its major cities, and you can see that same sort of visionary, furious growth everywhere you look in downtown Shanghai. Many of the extravagant hotels and malls and office buildings here weren't even gleams in architects' eyes five years ago, and the ubiquitous cranes suggest China is just getting warmed up.

I am to meet Michael Lee for the first time in Xintiandi, a downtown village-style mallish community of chichi restaurants, clubs, and retail shops. First, though, I find Michael Meyer, a college classmate of mine who went on to become an executive for the giant Tishman Realty & Construction, specializing in shepherding massive urban commercial projects through the maze of obstacles that confront any big development. Now, he is the president of Lee's company, the F&T Group, which is based in Flushing, a New York City neighborhood making up a chunk of Queens. Meyer ushers me up to a stunning, shimmering restaurant that Lee has mostly taken over tonight.

Meyer points out Lee, who is rushing around and between the large, crowded, boisterous tables of the restaurant in what seems to be a nonstop game of hit-and-run schmoozing that leaves his targets beaming. Lee spots us and comes over, and before Meyer can finish the introduction, Lee is pulling me to the tables, where I am paraded around to various groups of diners for enthusiastic introductions. Meyer has to translate Lee's words for me, even though Lee is speaking English. Apparently, one eventually gets used to his slightly garbled style of speech, which is not a product of poor grammar or thick accent but apparently something inherent to his palate. I'm being introduced, Meyer tells me with an apologetic shrug, as the famous business journalist who is following Lee around. "Michael doesn't try to impress you with who he is," Meyer adds. "He impresses you with who he is with."

The impressees tonight include a group of about 15 Flushing business people, bankers, and community politicians. Flushing is famous for its riotous ethnic and cultural diversity, but in recent years, its Chinese community has especially thrived. Lee has made his fortune on real estate development there, relying heavily on investment from a vast network of Flushing Chinese business people. He has already developed one large project there, the Queens Crossing complex, and his planned Flushing Commons development is among New York's very few huge, ambitious projects in the works. New York Mayor Michael Bloomberg has endorsed it enthusiastically. But many groups in Flushing are opposing the project, which has been wending its way through various bureaucracies for five years. To counter the criticism, Lee and especially Meyer spend much of their time making their case and forging stronger community ties. And so it is that the two have helped arrange for a China tour for these influential Flushingites.

Also here is a manager from a U.S. investment bank that is considering investing in Lee's projects and a manager from Shanghai Construction Group, a giant Chinese company that is partially government owned. Lee's ties to Shanghai Construction have been strategic to him since he was a subcontractor to the company in the early '90s, when Shanghai Construction built the Chinese consulate in New York City. The bank, Shanghai Construction, the Flushing movers and shakers—each of these contacts is individually important to Lee, but when brought together, they are worth more than the sum of the parts, because now they can influence and benefit from one another, further enhancing Lee's standing with all of them.

Lee's daughter Catherine joins the party. A stylish and polished 31, Catherine has held positions in China real estate development with two U.S. real estate industry titans. In 2009, she joined her father's company as a vice president, and she has much of the responsibility for making sure the Nanjing project stays on track. Now that both his daughter and Meyer are here to work the crowd, Lee himself seems content to stand back, literally in the shadows. But he misses nothing, and occasionally he calls Meyer over to point out someone who needs attention. Lee also almost never goes more than three minutes before speaking urgently into his cell phone, without ever taking his eyes off the crowd.

Sunday
We are at opening day plus one of the Shanghai Expo, a World's Fair—style event that has attracted global attention and tens of millions of visitors. Just as we are finishing up a VIP tour of the much-talked-about China pavilion, Meyer gets word that Annie Wu, a top executive of the World Trade Centers Association, has agreed to meet Lee at a restaurant nearby in the expo. We rush over. Though most people think of New York's former Twin Towers when they hear World Trade Center, that complex was simply the world's most famous World Trade Center. Most major cities around the world have World Trade Centers licensed by the association. Lee managed to secure the World Trade Center license for his Nanjing project early in the planning stages, which impressed the Nanjing government and helped Lee secure approval for the project. The World Trade Center folks, naturally, are delighted to be represented in Nanjing. Again, Lee has arranged for different groups to benefit from one another, all to his own benefit.

We are shown around by a manager and an assistant, and Lee almost immediately asks both of them what their salaries are. Incredibly, they tell him.

When we get to the restaurant, we are kept waiting and are eventually told that Wu is meeting in a private room with a number of other VIPs, and there simply isn't room for anyone else. Lee clearly takes this as a snub, and Meyer has to twist his arm to get him to stay and accept the invitation of some other WTC managers for lunch. Sulking, Lee slips into the bathroom, where I hear him shouting into his cell phone. The shouting suddenly stops, and he emerges, the picture of patience and goodwill. He is outgoing and charming through lunch. As soon as lunch is over, he pulls Meyer aside and tells him he is to do whatever it takes to set up a meeting between Lee and Wu, anyplace, anytime. He repeats this to Meyer five times within half an hour. Meyer can't understand why Lee is so intensely keen on meeting Wu after being shut out by her.

In the evening, we check out a well-known high-end Shanghai hotel, because the company that operates it is a candidate to manage the hotel that will be a key part of the Nanjing project. We are shown around by the manager and an assistant, and Lee almost immediately asks both of them what their salaries are. Incredibly, they tell him, and Lee casually suggests they consider leaving to work for him for more money. Even if nothing comes of the offer, Lee tells me later, the salary information is valuable to him, and now both employees want to stay on his good side and thus are more willing to give him inside information. Although much of what Lee does doesn't seem quite right at the time, he does have a way of looking effective in retrospect.

Monday
At F&T's cramped Shanghai offices, a U.S. architectural firm presents its recommendations for reshaping the plans for the Nanjing project, plans originally prepared by another firm. Lee has brought in this new firm in part because the Chinese government hired it to come up with the plans for a large office building in Nanjing, and Lee likes the idea of working with a firm that already has good Chinese contacts—it means those contacts become his contacts, too, plus the government will appreciate having its judgment confirmed. The new plans suggest shifting 130,000 square feet of floor space from the retail part of the development to the hotel—a risky move, because the retail portion is far more likely to be profitable. Bickering ensues among Lee's executive team members with regard to whether the new plan is better than the first plan, whether they're taking too long to decide, whether they even have enough information to decide. "We don't even know how many square feet we need for a toilet," grumbles Howard Hsu, Lee's chief architect. Occasionally, the heated dialogue slides from English into Chinese, leaving Meyer in the dark. He keeps prodding everyone to keep it in English, but once or twice gives up and plays games on his cell phone for a few minutes before trying again to steer everyone back to English. After 20 minutes, they have to break it off, because there is a train to Nanjing to catch. Just then, Meyer is stunned to get a call informing him that Annie Wu is on her way over. Lee becomes near hysterical, barking out instructions. He acts as if making a good impression on Wu is a life-or-death matter, and again Meyer tells me he's baffled by Lee's acute interest.

Allowing yourself to become an alcohol-poisoned wretch is not a sign of weakness. It is a badge of trustworthiness, conferring what some call the hangover of honor.

Wu shows up with a small entourage and makes a striking impression. She is a compact, prim, energetic, elegant woman who immediately impresses with her no-nonsense but not unfriendly manner. Almost as soon as she is introduced to Lee, she launches into a long, rapidly delivered monologue in English that somehow strikes me as both rambling and carefully constructed. It consists of a seamless series of microtales relating to both business and family—the line between them seems to blur—resulting in a complex web of vaguely interconnected details that include colleges attended by various characters, cities lived in, jobs held, government committees met with, partnerships formed, and more. Lee listens as if he is hearing the most extraordinary drama ever recounted. When Wu finally pauses, Lee points out that a few of his own family and business acquaintances have briefly intersected with hers. This leads to more detailed stories swapped back and forth about these mutual contacts. None of it seems related in the least to any business at hand.

While Wu and Lee continue on with great enthusiasm for several more minutes, Meyer is quietly briefed by a World Trade Centers Association executive. Wu, it turns out, is extremely influential with the Chinese government because of her own and her family's considerable success as entrepreneurs in Hong Kong, and she often serves as an adviser to Chinese officials in their dealings with Western businesses. Lee apparently discovered this and realized that Wu could be a powerful ally in keeping the Nanjing project on track, and in future projects. Wu's monologue, meanwhile, is essentially her way of uncovering mutual contacts. Doing business with friends and family is often considered unwise in the U.S., but in China, it is a cornerstone of dealings at all levels, and in fact it is hard to establish trust at all without a history of overlapping connections. The seeming snub the day before is just "part of the dance," says the WTC executive.

Lee obviously understands the ritual and has played it perfectly. After 10 minutes, he and Wu are acting like long-lost friends and have switched to Chinese. Wu finishes by brandishing a document with a flourish and handing it to Lee. It is a letter he is to present to the mayor of Nanjing.

"You see?" Lee gloats to me a few minutes later, as our car picks through chaotic traffic in a frantic race to the train. "In America, you need contracts; you need the law. Here, if the wrong person in the government doesn't like you, there will be no deal, and there is no appeal. Here, you need friends."

At the hotel in Nanjing, Lee immediately arranges to meet with one of the hotel management company's senior executives in the coffee shop. Lee asks the executive's advice about what sort of hotel Lee should build as part of the Nanjing project. This manager tells Lee to go big and upscale with the hotel and plan on losing a bundle doing it—he will get it back many times over on the retail, office, and condo side of the project from the branding that a ritzy hotel will splash on the project. Though Meyer has been telling Lee much the same, Lee, Catherine, and others in the company have been leaning toward keeping the hotel smaller and less costly. The manager insists that would be a big mistake—developers usually partly finance the construction by preselling fancy condos, but the condos won't sell well if the hotel is unimpressive; the Chinese are keenly brand conscious, more so than Americans. Besides, he adds, once the project is built, Lee can easily sell the hotel at a profit, but only if it's a class act.

Lee switches the conversation into Chinese and apparently makes the manager run through it all over again. "I can't be sure about someone's opinion until I hear it in Chinese," Lee explains to me afterward. That alone may help explain why so many Americans have difficulty making headway in business dealings in China—Chinese is a tonal language in which a slight change in inflection completely changes the meaning of a word, helping to make it a highly animated language and one of the hardest to learn, and relatively few Americans take the considerable trouble.

Dinner is a big banquet at a restaurant throwing together local officials, local business people, F&T managers, and the Flushing group. I sit next to a Chinese man who runs a high-fashion cable TV station seen only in gas stations alongside pumps—an extremely valuable media property, as it turns out, because only the most affluent Chinese own cars. But it's hard to focus on conversation, because people are randomly bolting out of their chairs, running around the tables to other banqueters, thrusting glasses of wine in their faces, and shouting, "Ganbei!" This translates roughly as bottoms up. It is not a suggestion. Failure to drain your glass on cue is a shocking breach of protocol, something along the lines of slapping away a hand offered for a friendly shake. As soon as your emptied glass hits the table, it will be refilled and ready for the next ganbei assault.

This routine sometimes goes to the point of hospitalization for alcohol poisoning for some of the participants. But allowing yourself to become an alcohol-poisoned wretch is not a sign of personal failure or weakness—on the contrary, it is a badge of trustworthiness, conferring what some call the hangover of honor. You are laying bare your true idiot self for your potential partners to evaluate. Even many top executives and influential politicians will hold you at arm's length until they have seen you wrecked. Drunken dinners are not entertainment after a hard day of business meetings. They are the business meetings, at which the key decisions about who will get the deals are forged. What happens during the day is often merely about preliminaries or ironing out details.

Tuesday
Every city, district, and development project in China apparently maintains at least one fabulously detailed scale model of itself with which to impress and educate visitors. The Hexi district in Nanjing is no exception, and we are all trotted up through a new, shiny, towering district-government building of vague purpose so we can see the district's 50-foot-long model. A government official takes us on a light-show-assisted scale tour of the district, which climaxes in the spotlighting of Lee's project, fully realized in the model. Everyone is suitably awed. A small pack of journalists is present, and Meyer is interviewed by a television crew while Lee stands in the background, looking content but watchful. On those occasions when Lee is pressed to speak, he turns the spotlight over to Meyer as quickly as he can. Meyer has loads of brand appeal in China, and Lee enjoys dramatically ticking off Meyer's sterling credentials: He has a Harvard M.B.A. (this always brings impressed nods from the crowd); he was a senior executive with a famous real estate developer (this raises the admiration to murmurs); and he is Jewish (this brings open oohs and aahs—it is widely held in China that Jews are business wizards). Lee often boasts to people how much he pays Meyer, claiming a seven-figure sum that makes Meyer laugh wistfully. "The greater my stature, the greater his," says Meyer.

A fancy bus takes us all a few blocks away to stop at the actual site of Lee's planned project, the one we've just seen in spectacular model form. The reality is considerably less spectacular. It's a vast, weedy, muddy field disturbed only by a few desultory watchmen, a couple of old cars, and a lone tractor. Lee's Flushing project has been in development since 2004, but he estimates it could be another 10 years before it's complete. He thinks he will have this Nanjing development up and running in as little as two years.

That's not an ambitious goal here. A short distance away is the enormous Expo Center, recently built up from a weedy, muddy field in 22 months. In fact, though we are surrounded by high-rises and a sports stadium and the Expo Center, there was virtually nothing but farmland here five years ago. The government simply decided it wanted development here, so there was immediate and steady development on a huge scale. Soon, Nanjing's subway system will be extended to the area, including a station that will be plunked down across from Lee's site, making the parcel an especially valuable one, given how dependent the Chinese are on public transportation.

Lunch is a banquet with Nanjing Deputy Mayor Lu Bing and a large group of city officials. Dinner is another ceremony and banquet, this one with Nanjing Vice Mayor Wang Shouwen. I am seated next to Ray Lei, a charismatic young Chinese fellow who is already a highly successful real estate developer throughout Asia. Lei, who speaks flawless English, tells me that he is Lee's nephew. I later realize he means that Lee is his uncle in the Chinese sense—which is to say, an older family friend or mentor who may well be treated with all the respect and affection of a blood tie. It was Uncle Lee, he explains, who counseled him to develop right in the center of large cities, where the challenges frighten away most potential competition. I ask Lei if he works banquet crowds as manically as his uncle does, and he tells me that he prefers to wine and dine potential contacts individually. "Banquets are expensive and call attention to you," he says. "I like to speak to people one on one; it's much more efficient." I see that Lei is Michael Lee 2.0—a fusion developer with an extensive network of contacts who can also bring sophistication and slickness to the table. In a sense, he is Michael Meyer and Michael Lee rolled into one.

Wednesday
The argument is raging in F&T's Nanjing office. The meeting was called to nail down the questions of how much space to give the hotel, how upscale to make it, and which architectural plan to go with. But broader tensions have boiled up. Meyer and Catherine can't seem to agree on anything, and the discussion becomes heated, until almost everyone is shouting angrily, and Hsu and a few others seem on the verge of tears.

This is when Lee seems to suddenly come to life with a smile, drawing a stunned silence. "I've heard what you all have to say," he says patiently, as if he has been presiding over an orderly discussion. "Now, let me show you something."

He stands up, grabs a marker, and heads over to a large whiteboard on the wall behind him. He starts to draw boxes with labels: hotel, condos, retail, construction companies, this bank, that investor. He connects the boxes with arrows and labels the arrows with large dollar figures. And he explains, box by box and arrow by arrow, how a combination of investments, loans, government breaks, and delayed contractor payments will keep the project afloat for several months, just long enough for the company to start preselling and preleasing condos, offices, and retail space to keep enough money coming in to continue with the construction. Each phase of the construction will then bring in new investments, loans, and revenue. Lee's diagrams cover the last section of the board as he explains how the project will be completed and making money in two years.

Everyone has been watching silently, jaws agape. The meeting suddenly erupts in nearly hilarious enthusiasm. They're back in business. As for the vexing questions about which path to follow on the project design, Lee points out they don't have to choose—they can simply fuse the two different schemes, sticking with the basics of the original plan but incorporating into it modifications based on the second plan. It strikes everyone as a perfect, and now even obvious, solution. The meeting has evolved into a celebration.

No one seems to resent the fact that Lee could have saved everyone chest pains by simply explaining his scheme earlier. "Michael is comfortable with conflict; he even encourages it sometimes," Meyer tells me. "He sees it leading to resolution and better understanding. The angrier people become, the more he learns from it."

Over steaks flecked with actual gold leaf, we are told the building was constructed in four years, and the fact that the global financial crisis played out in the middle of the project didn't slow it by a day.

Later, I ask Lee about his interest in letting his team fight things out. He smiles and tells me that I'm really in luck—Deputy Mayor Lu Bing has agreed to my request to be interviewed over dinner, a request I don't recall making. A bit later, Lee, Meyer, Hsu, two other F&T executives, and I show up at a luxurious chateau plunked down on a vast, magnificent estate of rolling hills. I'm seated next to Lu at yet another sumptuous banquet-hall feast and directed to publicly interview him, which I do. After the interview, when most of the others seem preoccupied with a round of nonstop toasting, I notice that Lee has pulled Lu to a corner of the hall and is having an animated discussion with him. Apparently, there are official reasons for dinner meetings, and then there are the real reasons.

Thursday
As we're checking out of the hotel, and I'm preparing to head to the airport, Meyer gets a call—there's a government-run real estate development group that wants to discuss prebuying the office tower. We rush to meet executives from this group at its latest project, an 89-floor tower that's the seventh-tallest building in the world. It's not open to the public yet, and we're among the first to get a tour. Over steaks flecked with actual gold leaf, served in an exquisite restaurant within the 445-room hotel that takes up the top half of the tower, we are told that the building was constructed in four years, and the fact that the global financial crisis and the bursting of the real estate bubble played out right in the middle of the project didn't slow it by a day. An executive from one of the U.S. investment banks involved in Lee's project shows up. But I never hear any real business discussed. In fact, Lee soon has the executives talking about family, and photographs come out.

When we leave, Lee seems pleased with how things have gone. "You see?" he says to me. "Here, you need friends."

Postscript
Shortly after Lee's visit to Nanjing, in a widely televised ceremony attended by Chinese government officials and various luminaries of the Chinese business world, ground is broken on Lee's project. It is not moving as quickly as Lee originally hoped, but it is on track to open in 2015.

The Flushing Commons project has been approved by the New York City Council. Lee needs additional financing to move ahead with it and is negotiating a deal with sources in China.

From the October 2011 issue of Inc. magazine

DAVID H. FREEDMAN: A Boston-based contributing editor, Freedman is the co-author of A Perfect Mess, which examines the useful role of disorder in daily life, business, and science.
@dhfreedman




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