China's family-run factories struggle to hand the business to the founders' children

Hanqing Fang, an associate professor at Missouri University of Science and Technology, separates what moves at a handover from what does not ^[16]. "Shares can be passed to a son or daughter overnight," Fang said. "But the heir is being asked to take over something that looks like a company on paper but, in practice, is closer to the founder's personal belongings." ^[5]

Ayu, who grew up in the home above his parents' Wenzhou shoe workshop ^[1], described the same gap from the heir's side. "The network is very difficult to inherit," he said. "You have to build it yourself. In the end, some people inherit an empty shell. On paper they're the boss, but the people underneath them have already begun to leave." ^[6] He puts the obstacle down to conditions more than reluctance. The market is much more competitive than when his parents started, he said, and the institutional knowledge and commercial relationships behind their success will be impossible to pass on ^[4]. "We inherited the wealth, but we couldn't inherit the industry," he said ^[7].

The survey evidence is thin and points the same way. In a study led by the University of Ningbo, 10 of 114 private companies said the family's second generation was managing them ^[9], about 9% ^[17]. A sample of 114 firms is a small base for a national estimate. The reporting also rests on two heirs ^[3][10], and it does not count how many children leave for other work or trace what happens to the customers of factories that falter.

For a company that buys from these factories, the exposure sits in Fang's second point. "The risk is not that these family firms simply disappear," Fang said. The risk is that "the capabilities embedded in the founder" are lost in the handover, among them "the knowhow, the supplier networks and the relationships" ^[14]. A supplier review that stops at ownership would show a clean succession, because shares are the part Fang says can pass overnight ^[5]. I'd expect the failure, where it comes, to be slow. The factory keeps its name under a new boss while staff and the founder's supplier relationships drift away, the pattern Ayu described ^[6].

The trade-off for a buyer is direct. A founder-run supplier offers personal relationships, experience and instincts, the things Fang says are difficult to hand to the next generation ^[16]. The same concentration ties the supplier's capability to one person, at a moment the Guardian describes as a generation of entrepreneurs retiring ^[19].

Wu named what deters him. "I really don't want to take over because there are so many interpersonal relationships and financial connections that I'd have to handle and learn about," he said ^[11]. He has not ruled it out. "I'd say that one day my parents' company will be mine. But I'm not ready yet, because it's not easy," Wu said ^[15].

The national stakes run over years. According to the Guardian, unsuccessful handovers can lead firms to lose value or close ^[13], and because family-run companies make up so much of the private sector, failure in their thousands could threaten China's future growth ^[18]. The decision in front of a sourcing team this quarter is narrower: whether it knows who, after the founder, holds the relationships at the family suppliers it depends on. A team that asks now has time to qualify a second source or follow a transition. A team that waits learns the answer at the handover, when, in Ayu's words, the people underneath have already begun to leave ^[6].