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East Star’s Lan Shili: ‘Entrepreneurs Have to Be Bold to Do Big Things’ - Knowledge@Wharton
Mar 18, 2014 Asia-PacificChina
Lan Shili is a controversial businessman in China. He started his career in 1991 with 300 yuan (around $50) in his pocket. In 15 years, he had made it to the Forbes List for mainland China with a net worth of 2 billion yuan (around $300 million) and a rank of No. 70. In 2005, he started East Star Airlines to complement his real estate, tourism, telecom and other businesses and became one of China’s most high-profile entrepreneurs.
In 2008, the global economic crisis and natural disasters in China affected Lan’s aviation, tourism and real estate businesses. His East Star Group had to borrow money. Unable to repay, it ran into a convertibility clause which saw the equity in Lan’s prized possessions slipping out of his hands. Worse, in April 2010, Lan was charged with tax evasion and sentenced to four years in prison. He was released last August. In an interview with Knowledge@Wharton, he talks about his past and his plans for the future.
An edited transcript of the conversation follows.
Knowledge@Wharton: You have made a lot of investment decisions. Which one has had the biggest impact on you?
Lan Shili: My investment in East Star Airlines was the most significant. It sent me to heaven and also to hell. But I do not regret the decision.
East Star obtained approval from the Civil Aviation Administration of China (CAAC) in May 2005. We made our first flight in May 2006. East Star recorded a 10 million yuan profit in 2006. We had nine aircraft flying from Wuhan, Zhengzhou and Guangzhou. In 2007, we maintained our performance. I hired airline industry executives to manage operations. I was personally responsible for business and market development.
Our partners at that time were Goldman Sachs, Airbus, GE and other global companies. They brought to us an international perspective.
I have no regrets. Even today, I feel proud that we started an airline.
Knowledge@Wharton: Why did East Star Airline go bankrupt?
Lan: You can’t do much about macroeconomic factors. In 2008, there was a major crisis. Globally, there was a financial meltdown. In China, there were severe snowstorms [which were the worst in 50 years]. This badly impacted three major business of our group – property, tourism and airlines. The price of aviation fuel in the global market rose from $74 per barrel to $174 per barrel from 2007 to 2008. The price in China also doubled from 4,000 yuan per ton in 2007 to more than 8,000 yuan per ton in 2008. What made things worse was that the snowstorms in southern China were followed by floods in Guangzhou and Guangxi province and a disastrous earthquake in Wenchuan. All this was very bad news for us.
There was another key issue. I had purchased four new airplanes from Airbus. Everything including the aircraft and crew were ready except for one approval from the authorities. The six-month delay cost 200 million yuan. We took a 315 million yuan ($46 million) loan from the Rong Zhong Group. I had to pledge my holding in my real estate company. Both sides signed the mandatory equity transfer agreement. It stipulated that if we didn’t pay back the money in two years, we would have to transfer our stake in the property company to Rong Zhong. To this day, we have gotten a loan of only 80 million yuan ($12 million). But the shares in my property company have been transferred to them.
In late 2008, the Rong Zhong Group introduced us to China National Aviation Holding Company to talk about an equity investment in East Star. But they wanted us to sell out fully, and I said no. In March 2009, I was put under residential surveillance. One year later, I was sent to prison [for alleged tax evasion]. East Star flights were stopped, and the airline filed for bankruptcy in August 2009.
Knowledge@Wharton: Many people say that your aggressive financial style was the reason for the East Star disaster. You have also stated in public that you have to be bold enough to do a 10 billion yuan business even if you have only 0.1 billion yuan. Looking back, have you drawn any lessons?
Lan: The speech I made on the 10 billion yuan deal was mainly to express my idea that entrepreneurs have to be bold and adventurous to do big things. I am not so aggressive in financial decisions, and can even be described as conservative. I was in business for 18 years in Hubei province. For many investment decisions, I first did market evaluation. The East Star Group has several different businesses to spread risk across different industries. But in 2008, everything was negatively impacted at the same time.
The lesson I have learned is that I chose the wrong partner during a time of crisis. I should not have borrowed from the Rong Zhong Group.
“I have no hobbies; work is my hobby. I am still young and have enough time and energy to stage a comeback.”
Knowledge@Wharton: Some people blame your autocratic style of making decisions. How do you see it?
Lan: I am a positive, curious and restless person. I was head of class from childhood and always good at leading others. I like to excel in every subject and also to follow my own gut-feel and passion. This will not change.
Yes, many business decisions were made by me alone. But Warren Buffett and Steve Jobs have the same style and they have been huge successes. Decisions taken democratically will favor stable and low-risk options at the cost of sacrificing potential opportunities. My decisions were not wrong. But I met the wrong people.
Knowledge@Wharton: What is your view of the relationship between government officials and business people? (Lan sued a senior government official of Hubei Province from prison, accusing him of corruption.)
Lan: Many people say I don’t know how to handle the relationship between businessmen and officials. But if that were true, I wouldn’t have been able to expand my business step by step for 18 years in Wuhan. The temporary decline of East Star was only because we met individual officials seeking private gains and abusing their power.
Business people have to understand politics. But they cannot surrender the bottomline. I may have to stay away from some people even if that means reduced profit. I have to consider whether compromising will produce better results. I had compromised for a while, but the results were worse. That’s why I had to charge certain officials with corruption. That’s why I sued the Civil Aviation Administration of China in 2011. I now think confrontation is better than compromise. Attack is the best defense. There is no absolute security; you can only protect yourself if you are strong.
Knowledge@Wharton: Can you tell us something about your life in prison?
Lan: I was critically ill in the beginning. I wrote a letter – to be published posthumously — to tell people why I died and how I died. But, later on, I thought that I should get through these four years more positively. I began to realize that the setback was a good thing for me. I should use the peaceful time in prison to reflect on the past and prepare for the future. I subscribed to more than 20 newspapers while in prison. I read a lot of masterpieces. I have also written four million characters, which will be published soon. I want to tell people … who I am, what I have done, and the legacy [my businesses have] left for society.
When I was in prison, Wang Shi [founder and chairman of China Vanke, one of the biggest real estate companies in China] came to visit me. He gave me a lot of spiritual encouragement, which was very helpful. Wang said he had come to visit me on behalf of Chinese entrepreneurs. “We know what has happened,” he told me. “Your experience is torture, but it is wealth too. We support you now and in the future.”
Knowledge@Wharton: What have you done since you got out of prison? What is your plan for future business?
Lan: When I was in prison, I thought about the two ways I could go. One was to retire and rest. The second was to revitalize East Star and surpass what we achieved in the past. I chose the second way. I have no hobbies; work is my hobby. I am still young and have enough time and energy to stage a comeback.
“Decisions taken democratically will favor stable and low-risk options at the cost of sacrificing potential opportunities.”
I spent the first few months of freedom visiting friends and traveling abroad. Right now, I am trying to recover some assets through legal channels. I have also been experimenting with weibo (a microblog), weixin (mobile chat) and QQ (online chat). I want to discover the charm and impact of new media.
I have also plans to go to Harvard and Cambridge to soak in their academic atmosphere. This was my dream at school. I visited Wang Shi in Cambridge (Wang was a visiting scholar at Pembroke). That week in Cambridge was super. In the past, I was so busy there was no time or inclination to study abroad.
Knowledge@Wharton: What is your criterion to enter a new industry? Will you come back to airlines?
Lan: Everything is possible. After all, I have resources and experience in the aviation industry.
My future plans have two phases. First, revitalize East Star. Second, surpass the past. I have to wait for the new projects to mature. On new industries, I am more interested in tourism and emerging industries like those related to the Internet. The old businesses of East Star — technology, property and tourism — still have big potential. On my next entrepreneurial projects, I will make the most of my past resources and take on tourism-relevant business. However, it will not be simply copying the past model. I will develop new, innovative models. My target is to surpass the past not only in assets, but also in industry position. Some business friends have promised to support me through capital investment.
A setback is not a bad thing. The past failure and life in prison have not depressed me at all, but only made me stronger. My failure has made me better prepared to cope with crises in the future.
