The King of Shanghai Page 7

  “But you’re making knockoffs,” Ava said. “Are you saying the government condones that?”

  “We prefer to describe it as parallel manufacturing.”

  “A knockoff is a knockoff, no matter how you spin it.”

  “The government is quite comfortable for now with the term parallel manufacturing.”

  “You aren’t serious,” Ava said.

  “Of course I am,” Xu said, reaching for the wine bottle. “Would you like more?”

  Both women shook their heads. He poured some wine, took a deep sip, and then refilled the glass.

  “I have a factory about sixty kilometres north of here, just outside a town that has a population of twenty thousand and close to three or four villages that among them have another ten thousand residents. There was once a steel mill in the town; it closed five years ago. The villagers used to eke out a living farming, but as the population grew there was not enough arable land to employ everyone. Three years ago a delegation of government officials, farmers, and former steel-mill workers came to Shanghai to meet with me. The meeting was arranged by my man Suen — you both met him in Borneo, did you not?”

  “We did.”

  “He is from the town, and they approached him first. He came to me and I made some phone calls, including several to some senior people in Nanjing, since the district is within their jurisdiction. They made a simple request: could I find a way to employ these local people? Within a year a factory was built. It now has forty-seven hundred workers making cellphones.”

  “Knockoffs?”

  “iPhones.”

  “Knockoffs.”

  “Parallel manufacturing.”

  “What does the government say about that?”

  “They now have a happy town and four happy villages. And in Shanghai they do not have to worry about an influx of more unemployed people from the outlying districts putting extra stress on the social and economic structure.”

  “A very nice arrangement for everyone but Apple,” Ava said.

  “They will find out eventually,” Xu said.

  “And then?”

  “The government will deny it knew anything about it and shut us down. If Apple is not diligent in monitoring the factory, we might be able to reopen in a few weeks or months. But if they keep a close watch, then we will be out of that business.”

  “And move on to the next.”

  “And repeat the cycle, unless we can break the cycle.”

  “Break it? How is that possible?”

  “I mentioned history before. Can I bore you with some?”

  “So far, boring is not a word I would use to describe this conversation,” May said.

  Xu smiled. “Thank you for that. I’ll try to keep this short.”

  “Please. I know you’re going to get to the point, and I’m curious as to what it is.”

  “Okay, some history in short form. The societies came into being hundreds of years ago to help overthrow the Qing Dynasty and restore the Ming. After that finally happened, they lost their initial sense of purpose. Some disbanded; others found new reasons to exist and aligned themselves with martial arts associations, labour unions, or trading groups; and some — but not nearly as many as one would think — turned to criminal activity. A few, such as the Shanghai gang my father eventually took over, were some combination of those things. The overwhelming assumption when people hear the word triad is that it is synonymous with criminal. That is not the case — not historically and not now,” he said.

  “Xu, in Hong Kong —”

  “Yes, Ava, in Hong Kong it is likely true, but here it is not. My father’s cousin began Yan Yee Tong as a way to provide protection and assistance for relatives and friends from Wuhan, from Hubei province. He had many relatives, and maybe even more friends. It became a large organization because every relative and every friend saw the benefit of the assistance and protection they would receive, so they brought in their own relatives and friends. I told you earlier that I have more than four thousand members. What I did not tell you is that attached to them are more than forty thousand dependants.”

  “Workers?”

  “Some are, but it is not an inclusive arrangement,” he said.

  Ava watched Xu take a gulp of wine. A memory of the way Uncle used to consume his food jumped into her mind. She had often thought that the rushed way in which he ate belied the calm exterior he presented to the world. It seemed to her now that Xu was stressed, despite the fact that his face was composed and his words were measured. “What does that mean?” she asked.

  “You have heard of the thirty-six oaths?”

  “Yes.”

  “Do you know them?”

  “Not well.”

  “My father’s cousin, and then my father, took them to heart. Not every oath had the same weight, but every one that had an impact on their concept of family had special meaning. The first oath says, ‘After having entered the Hung gates, I must treat the parents and relatives of my sworn brothers as my own kin.’ And another that I have pledged to uphold is ‘I will take care of the wives or children of sworn brothers entrusted to my keep.’”

  “So that is how you get from four thousand members to forty thousand dependants.”

  “Exactly. They are obviously not all dependent, but where it is necessary, we educate the children, employ the adults, and take care of the elderly. And those who do not need our help are still part of Yan Yee Tong and loyal to Yan Yee Tong.”

  “Including some government officials?” May said.

  Xu’s head flicked sideways and a smile broke out on his face. “Yes.”

  “That’s clever.”

  “It is practical. We cannot offer the right kind of work to all those we have educated, and it is shameful to let an education go to waste. So it is inevitable that some of our people will work in the government.”

  “It seems to me that you’ve created one hell of a business,” Ava said. “Why do you need us?”

  He lowered his head and Ava saw his mouth tighten. “We are at a crossroads. The present situation, however stable it looks to the outsider, is not sustainable.”

  “Why?”

  “Part of it is our own doing. Years ago my father decided that we should get out of some of the more traditional society businesses. We gave up prostitution, protection money, and most gambling and drug dealing. These did not entirely disappear, of course. At the street level, some of our people had no other way to make a living, and Yan Yee Tong is not dictatorial. So although we guided those members to find other sources of income, not all of them did. But enough did that we can say, without being cynical, that Yan Yee Tong is not in those businesses anymore. For a few years we struggled financially as we made the transition, but eventually we crossed over, and our income stream grew to ten times what we had earned before.”

  “Parallel manufacturing?” Ava said.

  “Yes, primarily that, and over a wide spectrum. We started with clothes and luxury handbags and then moved on to CDs, DVDs, and computer software from companies such as Microsoft, Oracle, Apple, HP — basically any software that was for sale, we could provide at an enormous discount. And now we have moved even further up the high-tech chain by making iPhones, iPads, iPods, and some of the better-quality products from Apple’s competitors such as Samsung and Nokia.”

  “How do you manage — technically, I mean — to do that?”

  “We recruit talent and acquire the information we need from universities, other companies, factories.”

  “When you say companies, do you mean Apple and Samsung manufacturers?”

  “Some of them, but mainly those in the component business. Do you know what the component costs are for an iPhone?”

  “Of course not.”

  “The latest sixteen-gigabyte version contains one hundred and eighty dollars’ wor
th of component parts: nand flash, display, touch screen, processor, camera, battery, and so on. Apple buys those parts from all over the world — Japan, Korea, the U.S., Taiwan, Germany — and brings them to China, where they are assembled. Now guess what the assembly cost in China is for one iPhone.”

  “I have no idea.”

  “Less than seven dollars.”

  “Cheap.”

  “That is one word for it; another is exploitation. I mean, on every phone they are spending close to two hundred dollars outside China and seven here. So what we do — what we have done — is analyze and break down the components and make them all in China. I think Apple makes its parts in various countries for security reasons. We have no need for secrecy and so we have lowered the component cost to sixty-five dollars, with another ten dollars for assembly. So we make an iPhone — and provide more free apps — for a hundred dollars less than Apple.”

  “By stealing intellectual property.”

  “By being nimble.”

  “Where are your markets? Shanghai can’t be big enough to absorb all that production.”

  “The world is our market. We have been selling our products through the Triad network, through groups such as 14K and Sun Yee On. They have distribution channels throughout all of Asia, and into North America and Europe. For us, it made business simple. All we had to be concerned about was production. The rest of it, they looked after.”

  “But you’re still stealing intellectual property,” Ava said.

  “And that will come to an end,” Xu said.

  “You’re going to stop?”

  “When we have to.”

  “When is that?”

  “When the government decides.”

  “You make them sound like partners.”

  “They are, in the sense that we can keep making products like iPhones for as long as they condone it. But there will come a day when we will be more of a problem than an asset. China keeps growing, and as it does, it has to become more concerned about the face it presents. It wants to be a world leader, it wants to be respected, and it cannot be if it knowingly violates international trade agreements and ignores intellectual property rights.

  “For now, the need to feed, clothe, house, educate, and employ a billion and a half people still trumps the government’s desire to be seen as a responsible player in world affairs, but I can see a day, not so far ahead, when the balance will shift. It is my duty as head of Yan Yee Tong to prepare our society for that eventuality. I must forge the path for our next transition.”

  “Are you so certain that the government will move against you?” Ava asked.

  “They know who we are, they know where we are, and they know what we do. We do not hide,” he said, and then laughed. “As if we could anyway. In addition to the factories making software and phones, we have a group of plants about a hundred kilometres from here that, combined, employ close to six thousand workers making clothing. Try hiding that.”

  “But you’re sure they’ll come after you?”

  “Even if they do not, for me to think otherwise and not take precautions would be irresponsible.”

  “And we’re a precaution?”

  Xu leaned back in his chair and looked out the window. The brightly lit Bund was even busier than before. People crowded at the wall, taking in the night skyline of Pudong. Suddenly it struck Ava that there were no sidewalk vendors. “There are no salespeople on the Bund,” she said.

  “The government prohibits them,” Xu said.

  “When I came here years ago, there were rows of them,” May said.

  “Then one day the government said, ‘You cannot do this anymore,’ and the vendors disappeared. It was as if they had never existed,” Xu said. “And that will be our fate if we stand still.”

  No one spoke for a few minutes, but the room seemed full of noise as each of them sifted through the jumble of thoughts that Xu’s words had triggered. May Ling put her hands together in front of her face and pushed the backs of her thumbs against her mouth. Ava knew that sign — Xu had her attention.

  “You haven’t mentioned how much money you want to give us, and you haven’t given us a reason why we are the chosen ones,” Ava said.

  “We have one hundred and fifty million U.S. dollars put aside — all of it properly accounted for and legal in the government’s eyes — and sitting in a bank account here in Shanghai. I want to transfer it to your investment company. I want you to put our money to work.”

  “Good grief,” May said.

  “It is all that we have that is totally unencumbered. I wish it were more. In a few more months, if business keeps on as it has been, I may be able to give you that much again.”

  “You misunderstand me,” May said. “That is an enormous amount of money.”

  “As I said, I wish it were more.”

  May leaned forward, her fists resting on the table. “Why give it to us?”

  “You have expertise that we don’t have.”

  “You can buy expertise.”

  “Not in China, at least not from anyone with the track record of success that you’ve achieved. And most certainly not from anyone worthy of the trust we need to place in them.”

  “You don’t know me well enough to trust me,” May said.

  “I know that you have a reputation as a remarkably astute and respected businesswoman.”

  “That doesn’t speak to trust.”

  “Ava’s involvement does. In truth, we would not be having this conversation if she were not a partner in your business. I do not mean to diminish your role, because it is very important, but if Ava were not your partner, there would be nothing for us to discuss.”

  “Are you always this honest?” May said.

  “No, I am not. I am typically selective in what I say and to whom I speak.”

  “Why are we so privileged as to hear your truth?”

  “I need you, and I have decided I can trust you.”

  “You mean you trust Ava.”

  “Uncle trusted her more than anyone in his life. That is all I need to know.”

  “He still casts a very long shadow.”

  “And I will be in that shadow for as long as I live.”

  “We all loved and respected Uncle,” Ava said. “That doesn’t mean we should be business partners.”

  “Look, I have a problem that I have tried to outline here tonight, and an opportunity that I think you might like if you take the time to think about it.”

  “So far all you’ve said is that you have money you want to put into our investment company. We have no idea what terms or conditions accompany it,” Ava said.

  “Invest the money for us as you see fit and return fifty percent of the profits the money generates.”

  “Fifty percent sounds like a partnership. We can’t partner with you.”

  “I know. Your company would own one hundred percent. We do not need our name attached to anything.”

  “So Yan Yee Tong would just hand us one hundred and fifty million dollars?”

  “No, the money would come through a company called Xin Fang Fa. We need Yan Yee Tong to be as far removed as possible from the money and any investments — and that is something I imagine you would like as well. We set up Xin Fang Fa by pooling funds from more than thirty different companies, none of which are legally attached to Yan Yee Tong. Sun Fong Fa is a co-operative with more than a thousand members and a board and chairman who are elected. None of them can be identified as having a Yan Yee Tong affiliation unless someone wants to spend a lot of time digging into their lives.”

  “But someone might want to do that.”

  “There is always that chance, but I promise you we have done everything possible to separate the money’s origin from its source.”

  “If the money is clean, why is that necessary?”

>   “Because in this country things can be too easily undone. If the day comes when the government decides Yan Yee Tong is no longer desirable, it will eradicate us. What was legal or not legal will not matter.”

  “That’s true enough,” May said softly.

  “All right,” Ava said, glancing at May, who was in turn staring at Xu, “assuming the money is clean, what terms would it come with?”

  “I told you, we want fifty percent of the profits.”

  “Plus interest?”

  “No interest.”

  “What if we lost money?”

  “There is always risk. We would not give you the money unless we valued your judgement, but things happen, and we are prepared to live with that possibility.”

  “So fifty percent of any net profits?”

  “Yes, and the Xin Fang Fa board would require that you report investment activity on a quarterly basis. Profits from ongoing businesses can be transferred annually, but if you sell a business they would like to get their share of the proceeds as soon as the transaction concludes.”

  “You would put this in writing?”

  “Only if you need it.”

  “What, you would prefer a handshake?” May said.

  “In your world, is everything always sealed with a contract? Did you and your husband build your business using lawyers and accountants? Did Ava and Uncle conduct their business based on written agreements?”

  “Of course not.”

  “So do not look so surprised when I say we do not need a contract. And I do not need your handshake either. Your word is good enough.”

  Ava saw May start to bristle and stepped in. “Xu, I need to know — did you discuss this plan of yours with Uncle?”

  “I did.”

  “When?”

  “We had been talking for a while about finding a way to protect Yan Yee Tong moving forward, but we did not discuss your business until his last trip to Shanghai.”

  “And this was his idea, that you come to us?”

  “No, it is mine. He thought it had possibilities and that it might be worth exploring, but he never suggested that I make this offer.”