Returning Chinese Find a Tough Market

Alex Xu has worked in the trenches at the old Broadway department stores, managed the complex finances of the Santa Anita racetrack and built thousands of homes in Southern California.

But all that wasn’t enough to prepare him for doing business in China.

Since coming here three years ago to start a chain of budget hotels, the 41-year-old Chinese American says, he has run into a maze of regulations and permits that, by comparison, makes California look like an easy place to do business. He says that he also has been pressured to pay bribes and that in one city, his employees were beaten by thugs.

Sometimes Xu has fought back. But mostly, the math whiz turned entrepreneur has bided his time and sought out relatives and friends to help him get around obstacles.

He has opened nine GreenTree Inns in China and, along with a handful of other hotel companies, is racing to tap the nation’s boom in business and leisure travel.

“I’m far behind my original plan,” said Xu, who splits his time between Shanghai and Los Angeles, where he is president of American Pacific Homes Inc. and lives with his wife and two children.

Xu has flown back and forth so many times that he knows the pilots on China Eastern Airlines by name. Last year, he missed Christmas and his wife’s and 11-year-old daughter’s birthdays -- he sent them a dozen roses each.

“It’s been a bumpy road,” he said.

Xu is among tens of thousands of overseas Chinese who have returned to their motherland for work and business opportunities. The Chinese call them “sea turtles” -- a play on the characters hai gui, which mean “returned from overseas studies.”

Many sea turtles from the United States come from California, home to more than 1.1 million ethnic Chinese.

The Chinese diaspora, estimated at 35 million in Asia and elsewhere, gives China an advantage that other Asian economic powerhouses such as Japan and South Korea don’t have.

Overseas Chinese like Xu bring with them not only money -- he and his backers have invested $20 million -- but also sophisticated technology and management skills honed over many years. China desperately wants these to move beyond low-cost manufacturing and grow its high-tech and service industries, which many cities are trying to do.

“Because Shanghai is developing, their experience will be precious,” said Zhou Hong, division chief of Shanghai’s Overseas Chinese Affairs office. He estimates that 15,000 Chinese from abroad have started businesses in the city.

Chinese returnees have some obvious advantages over foreigners doing business in China. In addition to language, they tend to have greater familiarity with the culture and markets, as well as personal connections.

But success is far from assured, as Xu’s experience illustrates.

Xu lived away from China for a long time, more than most sea turtles, having moved to California in 1987 as a graduate student in mathematics at USC.

But the native of Shandong province is no stranger to Shanghai. Xu’s wife, Wang Wei, was born and grew up here, and the couple had traveled to Shanghai and other Chinese cities on numerous occasions.

“When I visited China I always stayed in a five-star hotel,” he said. “No one was offering business travelers an affordable option.”

In late 2003, Xu drafted a business plan, enlisted an architectural firm in Orange County, hired four people in China and began to look for a site for his first GreenTree Inn. He found it in an empty vocational school in Jingan district in the middle of Shanghai a couple of blocks away from glitzy Nanjing Road. All he needed was government approval.

As head of American Pacific Homes in Montclair, Xu is used to dealing with planning departments and community groups and waiting for permits. But he never expected that he would need approvals from 11 agencies to open a hotel in Shanghai. There was the police, the fire department, various business licensing bureaus and foreign enterprise offices.

In some cases, Xu had to clear one agency before he could move on to the next. Yet the tasks of the different bureaucracies weren’t always specified.

“Many times,” he said, “they would kick the ball back to each other.”

Xu had a dozen people on his payroll helping, including accountants and hotel managers. A college classmate of Xu’s wife introduced him to a Shanghai government official who helped move the ball forward.

Six months later, Xu had all but the final stamp of approval and was allowed to open his hotel for 30 days on a provisional basis. But the month passed and he heard nothing. The hotel was on tenterhooks; it couldn’t check in any new guests.

When the final go-ahead came three months later, Xu says, he was practically numb. He never had a grand opening because he didn’t know when the hotel would clear the last hurdle.

“People have the belief that because the Chinese government has an open-door policy, it must be very easy,” he said during a recent three-week visit to China.

“The learning curve to do business is a lot higher here.”

Along the way, Xu also learned a few things about the Chinese approach. Three flag posts stand in front of his green, 140-room hotel; China’s flag must be in the center. Every night, hotels must submit a record of all registered guests to the local police.

And if you want plants and the street outside your door to be clean and well kept, it helps to have a friend on the neighborhood committee.

The next eight hotels came together faster, including two more in Shanghai, but not always without trouble.

Xu was reluctant to discuss specifics, but he said that in one city, a restaurant tenant in Xu’s newly acquired property refused to move out. On a recent weekend, the tenant hired thugs who jumped behind the hotel counter and attacked some of Xu’s managers.

GreenTree called 110, China’s 911, but the police, he said, looked the other way.

Xu wasn’t at the site at the time, but his managers hired guards to keep the restaurant closed and hold the gang at bay.

“They realized we were deadly serious and agreed to move out in three days,” Xu said.

In Southern California, Xu lives a quiet, comfortable life, albeit a busy one. In addition to his home-building business -- the main projects are in Ventura County -- he invests in properties such as office and medical buildings in the San Gabriel Valley.

Xu admits he is a workaholic, answering e-mails at 3 in the morning to his employees in China who are at work.

“The kids and I just got used to it,” his wife said, adding that “it all happened gradually.” In 2002, Xu flew to China twice for business. He made four trips the next year, then eight in 2004 and 10 in 2005.

When he’s not working, Wei said, Xu likes to play board games at home with his children, Ashley and 6-year-old Brian.

Xu didn’t have an easy childhood, growing up poor in a farming village near Weihai, a port city southeast of Beijing. His father was a doctor of Chinese medicine, but during the Cultural Revolution he picked up a farm hoe, planting wheat and corn in the summer and potatoes and radishes in the fall. Xu’s mother went to work with the local government. Between them, they earned about $12 a month, which they used to buy salt, oil and clothes.

Xu recalls that he and his younger brother and sister tasted meat only three times a year.

Xu flourished in school, graduating from the Beijing Institute of Technology at age 20. While working as a research analyst at a government agency specializing in aerospace, he studied English at night. He won a scholarship to USC.

He had earned master’s degrees in applied mathematics and engineering and was studying for a doctorate when he met Brian Fleming, an American executive. Xu was tutoring Fleming’s daughter in math, and one evening, he confided in him: Business was his passion, not academics.

A month later in 1990, Fleming, then chief financial officer of Broadway Stores Inc., offered Xu a job in the company’s financial systems department. A year later Broadway was in bankruptcy reorganization; it would eventually see its name replaced by Macy’s.

Fleming left three years later for Santa Anita Realty Enterprises Inc. and took Xu with him as the company’s finance director.

“Alex is a genius in math. He has an incredible ability to focus,” said Fleming, 62, now chief financial officer at BCBG Max Azria Group Inc., a Los Angeles-area fashion company.

Xu hopes to build hundreds of GreenTree Inns throughout China. He has 10 under development and plans to open 50 this year, most in southern China.

At less than $30 a night on average, GreenTree Inns cost a fraction of the price of many five-star hotels that are favored by executives.

Xu believes that most corporate travelers won’t mind giving up a swimming pool, a big health center and luxury restaurants. What they want, he says, are a good location, comfortable bed, clean facility and Internet access, which is free in every room at GreenTree.

Chinese travelers also want a tasty breakfast buffet. For a little more than $2, Xu offers a mix of Western and Chinese dishes, including eight to 10 vegetables, much of it prepared from the freezer to reduce waste.

Until now, the occupancy rate of GreenTree Inns open at least six months has been running at 90% or higher, Xu said. That compares with a national average of 60% to 70% for all hotels, said Zhang Minghou, a spokesman for the China Hotel Assn.

By the association’s count, China has about 200,000 lodging places, including 10,000 that are star-rated by the government.

Zhang estimates that the hotel market for business travel is growing at least 10% a year.

“This is an emerging market with a large potential,” he said.

Zhang recently visited a GreenTree Inn in Shenzhen, though he didn’t stay overnight. He says he went away generally impressed with the location and cleanliness of the facility.

But he adds that it’s too early to tell whether Xu and GreenTree will succeed.

A pair of state-owned hotel operators and international chain Super 8 Motels are aggressively targeting budget-conscious business travelers, and many others are trying to enter the market.

Xu says he doesn’t worry about competitors as much as he does his management and the chain’s ability to grow while maintaining high standards and principles. For the most part, Xu says, he lets the staff run the hotel and work with local officials and vendors as needed.

But he draws the line at bribery.

One utility company, Xu says, insisted that GreenTree pad the rates.

When the hotel said no, the utility representative told Xu, “Sorry, you won’t have gas.”

The hotel switched to higher-cost diesel fuel.

“I probably will never get used to the way it’s done here,” Xu said. “But I don’t want to. We have to be different and not be afraid.”